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Use the AS-AD model where the central bank follows an interest rate rule with an inflation target, = + ( ) to analyse the impact
Use the AS-AD model where the central bank follows an interest rate rule with an inflation target, = + ( ) to analyse the impact of a large increase in the relative price of oil, where oil is an input in production (along with labour). Assume that the economy begins in the medium run equilibrium.
B) Explain what would immediately happen to the AS curve in response to the oil price increase.
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