An Oil Cartel Effectively Increases the Price of Oil by 100

Essay

An oil cartel effectively increases the price of oil by 100 percent, leading to an adverse supply shock in both Country A and Country B. Both countries were in long-run equilibrium at the same level of output and prices at the time of the shock. The central bank of Country A takes no stabilizing policy actions. After the short-run impacts of the adverse supply shock become apparent, the central bank of Country B increases the money supply to return the economy to full employment.
a. Describe the short-run impact of the adverse supply shock on prices and output in each country.
b. Compare the long-run impact of the adverse supply shock on prices and output in each country.