Brent, the international oil marker, hit US$130 a barrel on 8th March 2022. The oil price is close to 90 per cent above their level at the same point in time last year.

Suppose that the rise in oil price is permanent. It creates an inflation shock and, at the same time, reduces potential output. With the aid of AD-AS model, show the difference in the effects of the oil price increase on output and the inflation rate in the long run if the government does not engage in stabilization policy and if the government does engage in stabilization policy to keep the inflation level low. Please elaborate your answer verbally.