In the accompanying diagram, the economy is in longrun

macroeconomic equilibrium at point E1. Suppose that there is a

temporary, but significant, increase in oil prices in an economy with

an upward-sloping SRAS curve. Based on the diagram, answer the

following questions.

a. How do the aggregate price level and aggregate output

change in the short run as a result of the oil shock? What is

this phenomenon known as?

b. If policymakers wish to prevent the equilibrium price level

from changing in response to the oil price increase, should

they increase or decrease the quantity of money in circulation? Why?

a. Suppose that there is a temporary, but significant, increase in oil prices in an economy with an

upward-sloping SRAS curve. In this case, however, suppose that policymakers wish to prevent

equilibrium real GDP from changing in response to the oil price increase. Should they increase or

decrease the quantity of money in circulation? Why?

b. Can policymakers stabilize both the price level and real GDP simultaneously in response to a

short-lived but sudden rise in oil prices? Explain briefly.

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