Question 6 (20 points). Suppose there is an exogenous increase in the price of oil in an economy.

a. (10 points) Use the aggregate demand and supply model to illustrate and examine the impact of the oil-price increase on output, employment and the price level in both the short run and the long run.

b. (10 points) If the Bank of Canada cares about keeping output and employment at their natural-rate levels, what is the policy response of the Bank of Canada? What is the impact of policy response on the price level? Use the aggregate demand and supply model to explain your answer. Please illustrate your answers using figures with aggregate demand and supply curves. Please also briefly explain the answers in words.