(a) If oil prices increase, use the AS-AD model to show how this increase in oil prices as an adverse supply shock. How would this affect, the price level? real GDP and unemployment.

(b) What is a policy response the Fed could do to help alleviate the adverse shock in part (a)? Graph how this response would work? What are the associated trade-offs of the policy given the model?

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a An increase in oil prices is considered an adverse supply shock because it leads to higher production costs for firms Using the Aggregate SupplyAggr... View the full answer