Problem 3 Suppose Saudi Arabia, a large oil exporter, is the home country and is initially at the full employment or potential level of output. Suddenly the world price of oil rises from $50 /barrel to $100 /barrel. a) Dene the terms of trade (TOT). Does Saudi Arabia's TOT increase or decrease following the rise in the world price of oil? Is this a positive or negative TOT shock for Saudi Arabia? b) Using the AA-DD model, illustrate the effect of the terms of trade shock on output and the exchange rate. Explain the economic intuition behind the changed in the AA-DD model. c) What government policy would you recommend to bring the economy back to its potential level of output (this could be monetary or fiscal policy - the choice is yours)? Illustrate the impact of such a policy using the AA-DD model. d) Suppose the price of oil falls from $100/barrel to $50/barrel. How would you answer to a), b), and c) change? Describe briey [you can use the AA-DD model to answer this question, but you don't have to; feel free to describe in words]