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Question 2: AD-AS (a) Assume that technology improves such that there is a negative shock to the price at which goods are supplied in

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Question 2: AD-AS (a) Assume that technology improves such that there is a negative shock to the price at which goods are supplied in Jamaica. Use a carefully labeled diagram consisting of a long-run aggregate supply curve (LRAS), a short-run aggregate supply curve (SRAS), and an aggregate demand curve (AD) to illustrate the effect of this positive supply shock in the short run and the long run. Please explain the process from the short run to the long run. (6 marks) (b) To possibly minimize the effects of the shock, assume that instead of allowing the market to adjust on its own, the government decides to use monetary policy as a stabilization tool. Use a carefully labeled diagram to illustrate the effect of the shock from part (a) incorporating the government's policy decision. (6 marks) (c) Is it better if the government intervenes in the market to accommodate such shocks or is it (2 marks) better to allow the market to adjust on its own? (d) What if instead of the negative supply shock, there was a positive demand shock? Use a carefully labeled diagam to illustrate the effect of this shock in the short and long run assuming no government intervention. (6 marks)

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