Assume the economy starts at the natural level of output. Now suppose there is an increase in the price of oil.

1. In an AD-AS diagram, show what happens to output and the price level in the short run and in the medium run.
2. What happens to the unemployment rate in the short run? Medium run?
3. Use an IS-LM diagram to show what happens to the rate of interest and investment in the short run and the medium run
4. Suppose the government decides to respond immediately to the increase in the price of oil by increasing government expenditure on goods and services. The goal of the government is to keep output at the initial equilibrium level. Show how the government's action affects the AD-AS curves in the short run and in the medium run
5. Use IS-LM diagram to show what happens to the rate of interest and investment in the short run and the medium run when the government increases its expenditure?