This question will ask you to compare the effects of a temporary versus permanent supply shocks in the IS-LM model. For full credit, please draw two IS- LM graphs side-by-side following the instructions below
a. Use the IS-LM model to analyze the general equilibrium effects of a permanent increase in the price of oil (represented by a decrease in both z and z') on current output, real interest rate, the real wage, employment, consumption, investment, national savings, and the price level. Use the first of the two side-by-side graphs to show the effects of this shock. Hint: besides reducing the current productivity of capital and labor, the permanent supply shock lowers both the expected future MPK and households' expected future incomes. 

b. Now consider a temporary supply shock (a decrease in just z). Plot the effects of this shock on the second of the two IS-LM graphs, and describe its GE effects on current output, real interest rate, the real wage, employment, consumption, investment, national savings, and the price level. Hint: assume that both the temporary and the permanent shocks produce an equal effect on current output. 

c. Compare the two graphs to prove that, following a permanent supply shock, the increase in the interest rate (if any) is smaller in magnitude than in the case of a temporary supply shock.