Time left 2:26:52 Question 4: The World economy in 2022 and growing concerns - 25 marks in total [Please note that you need to complete drawing the AD-AS diagram on your own piece of paper as you explain your answers for both part (a) and part (b) of this question. Take a photo-shot (or screen short) of the completed diagram ONLY and upload it together when you submit your exam paper at the end of the exam. However, all your explanations MUST be written in the space provided in the online exam paper] Recently, significant disruption of logistics and supply chains, shortage of energy supply, and a rapid price rise of international grains and raw materials, particularly mining products, triggered by various factors such as ongoing COVID-19 pandemic, international trade frictions and War in Ukraine, have caused growing concerns to the World economy, as it is highly likely to result in problems in industrial production activities and the cost of living. An economy like the European Union (EU) heavily depends on imports of energies and industrial raw materials for its production activities. (a) Suppose the EU economy is currently at the full employment long-run equilibrium. Using the AD-AS diagram below as a starting point, discuss and complete the graph showing how the equilibrium output, price level and the unemployment rate would be affected by such disruptions mentioned above in the short run. (15 marks) Price level LRAS = potential GDP SRASOPrice level Time left 2:26:35 LRAS = potential GDP SRASO ADO Q* Real GDP (b) The European Union (EU) is concerned about the likely effects of such disruptions you identified in part (a) above. Assuming the European Central Bank (ECB) keeps its monetary policy unchanged and everything else remains unchanged, what type of fiscal policy (expansionary or contractionary) and why would you advise the EU government to pursue in order to return the economy to long run equilibrium? Do you think the type of fiscal policy you would recommend would help the EU solve the issues involved in both real GDP and the cost of living? Use the AS-AD model in (a) to explain your answer. (10 marks)