"In the event of a negative short-term aggregate supply shock, accommodating policy can be effectively used, but at the cost of higher inflation."

1. Use the AD-AS model including both the short-run and long-run supply curves to explain the statement above. Label each curve as well as different levels of price and output to get full credit. (15 points)

2. Provide an example of a recession caused by a negative aggregate supply shock in the U.S. history. (5 points)