Russia is one of the largest producers of the world's oil. On 8 March 2020, Saudi Arabia initiated a price war with Russia, facilitating a 65% quarterly fall in the price of oil. Suppose the price of crude oil relative to all other goods and services is temporarily lower. Global demand for oil decreased as well due to the coronavirus pandemic. Assume the oil price shock decreases the Russian domestic price level less than the decrease in price levels in other countries.

a. (6 Points) All else equal, use an AA-DD-XX diagram to analyze how price decreases in oil affect the Russian nominal exchange rate and economic output in the short term.

b. (2 Points) Suppose Russian price levels remained essentially unchanged after the oil price shock. Is the Russian current account above or below their current account target? Explain your answer.

c. (2 Points) Following from above, what policy action can the Russian government or its central bank take in order to achieve their current account target in the short term?