Show what happens in an is-lm and ad-as graph

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Reference no: EM131806179

Question: Consider the Aggregate Demand-Aggregate Supply framework. Suppose we are not in a liquidity trap (and do not end up in a liquidity trap), and the Fed does NOT target the interest rate. Show what happens if oil prices suddenly increase for one period and stay permanently higher. You can assume for simplicity expected inflation is always zero.

1. Show what happens in an IS-LM and AD-AS graph in the period the shock occurs.

2. Show what happens over time to output, the price level, and the interest rate.

Reference no: EM131806179

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