Question: There is a decrease in oil prices, and everyone believes this decrease to be temporary. You attend a meeting at the Bank of Canada and
There is a decrease in oil prices, and everyone believes this decrease to be temporary. You attend a meeting at the Bank of Canada and hear their analyst suggest, "Low oil prices increase the aggregate demand, and we face a real possibility of increased inflation. To prevent undesirable inflation, we must reduce the money supply." Using the AD-AS model, analyze the analyst's proposal, i.e., explainwhetherandwhyhis proposal would prevent undesirable inflation (achieve price stability).
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