Question: Beginning with output equal to potential(Y*), suppose there is a large and sudden increase in the price ofelectricity, which is a major cost of production

Beginning with output equal to potential(Y*), suppose there is a large and sudden increase in the price ofelectricity, which is a major cost of production for most industries.

a. What type of economic shock isthis? (AD orAS; positive ornegative; temporary orpermanent)

b. If there is no policyresponse, how could the economy return to thelong-run potential outputlevel? Explain the adjustment mechanism. What happens to the pricelevel?

c. If thecountry's central bank deems it necessary to intervene and chooses to stabilizeinflation, explain the monetary policy it would adopt(tightening or easingpolicy); would the Bank raise or lower the interestrate? what would happen to the outputlevel?

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