N7

5. Consider the extended IS-LM-PC model of chapter 9. Suppose the economy is initially atY=Yn. Then there is an increase in the relative price of oil. (a) Explain, using the WS-PS diagram, how this will affectu=un. How will potential outputYnbe affected? (b) Suppose the IS curve does not shift and that monetary authorities initially leave the real policy interest raterunchanged. What problem will emerge over time? Illustrate your answer diagrammatically. (c) How will policymakers likely respond over time? Explain.