Question 14 (30 marks) (a) Assume a closed economy with flexible prices and wages in equilibrium. Using the AD-AS model, identify the impact of the following shocks in the short and in the long run. Explain the adjustment process between the short and the long run equilibrium. (i) Due to a successful vaccination roll out, the retail sector is open for business again, driving pent up consumption. (6 marks) (ii) Due to a restriction on recruiting migrant workers from certain countries, there is an increase in labour costs incurred by firms in the economy. (6 marks) (b) With reference to each of the two shocks described in (a) above, identify and comment on possible policy responses if the government or the central bank wants to avoid short run fluctuations in output and the price level. (10 marks) (c) In an election year, the government increases public spending to boost its re- election chances. Use the Phillips curve to analyse the short and long run impact on an economy, of this fiscal expansion. Assume that the Central Bank is known to be not independent, and as such, has no credible commitment to inflation stability. How would your answer change if the Central Bank could credibly commit to meeting its inflation target? (8 marks)