Question 2 - Oil prices and the macroeconomy Assume that the economy starts at the natural level of output. Now suppose there is a permanent increase in the relative price of oil. a. Using the wage-setting and price-setting diagram (and explaining the intuition of the curves), show what happens to the unemployment rate in the medium run. Why does this happen? (4 marks) b. Assuming a simple production function, Y=N, where Y is output and N is employment, explain what happens to medium- run equilibrium output. (2 marks) c.Assume the central bank has an inflation target. In an ASAD diagram (explaining what lies behind the curves), show what happens to output and inflation in the short run and the medium run. (4 marks)