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Insert Table Chart Text Shape Media Comment Question 2: [20 marks] Suppose the oil prices have increased due to which cost of production increased: a. [7 marks] Use an aggregate-demand/aggregate-supply model to show the short-run effect of increase in oil prices. Label the initial equilibrium as A and the new short run equilibrium as B. (Explain in detail what happens in the short run). b. [6 marks] Now use the diagram from part (a) to show the new long-run equilibrium if the government wants to use fiscal policy to bring the economy to its natural level of output. What type of policy the government should use? What happens to prices and output in the long run? Label the new long run equilibrium as C. c. [7 marks] Redraw the diagram from part a). Now assume that the government wants to keep the price level stable at its initial long run level. What type of fiscal policy should it use? What happens to output and prices in this case? Can the government use a policy to bring the price and output both to the initial long run level? Why or why not