Macroeconomics 1st Edition by Dean Karlan,Jonathan Morduch

Exercise 12

For questions 13-16, use an AD/AS model to answer the following questions. In each case assume the economy starts in long- and short-run equilibrium, and show the appropriate shifts in the AS or AD curves.
Suppose a revolution in Iran results in a significant reduction in the world's supply of oil.
a. Show what happens to price levels and output in the U.S. in the short run.
b. Suppose the government takes no action to help the economy. What happens to price levels and output in the long run?
c. Suppose, instead, the government decides to take action to help the economy. What action(s) would you recommend? Why?
d. If the U.S. government makes the appropriate policy response, what happens to price levels and output in the long run?