$)$ Use the aggregate demand$-$short$-$run aggregate supply$-$ Long$-$run aggregate supply

$($AD$-$SRAS$-$LRAS$)$ model to answer the following questions

i$.$

Assume that OPEC starts enforcing oil production quotas and the global

supply of oil declines. As a result, energy prices starts to increase. This causes

the costs of production for Kenyan firms to increase. Use the

AD$-$SRAS$-$LRAS diagram to describe the transion of the macroeconomy from

the short$-$run to the long$-$run without government intervention.

Marks$)$

ii$.$ Now assume the Central Bank and Parliament are concerned about future

inflation, output and unemployment. Describe the possible stabilization

$(8$

strategies for parliament and Central bank. In particular, discuss the tradeoffs

they face.