Suppose an economy employs labour and capital to produce output. Assume that an exogenous shock increases the price of labour in the economy, other thing being constant. a. (8 points) Use the aggregate demand and supply model to illustrate and examine the impact of the labour-market shock on output and the price level in both the short run and the long run. b. (8 points) If the central bank cares about keeping output at their natural-rate levels, what is the policy response of the central bank? 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.

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