Use the AS-AD model where the central bank follows an interest rate rule with an inflation target, π Tt = in + α(πt-πT) 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. (IF YOU CAN ONLY ANSWER ONE PLEASE ANSWER Q2 1) Explain why a relative oil price increase has the same qualitative effect on the economy as a rise in the mark-up, m, on marginal cost by firms 2) Explain what would immediately happen to the AS curve in response to the oil price increase.

Use the AS-AD model where the central bank follows an interest rate rule with an inflation target, π Tt = in + α(πt-πT) 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. (IF YOU CAN ONLY ANSWER ONE PLEASE ANSWER Q2 1) Explain why a relative oil price increase has the same qualitative effect on the economy as a rise in the mark-up, m, on marginal cost by firms 2) Explain what would immediately happen to the AS curve in response to the oil price increase.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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