Suppose there is a huge discovery of oil reserve in the US that results in the drastic cut of oil prices. DRAW A GRAPH HERE to answer part a, b, and c. (Label the graph)
a. What happens to the aggregate demand and supply curves in the US as a result of the shock above? (draw the effect in the above graph and prepare explanation below)
b. How will output and prices change in the short and long run? (draw the effect in the above graph and prepare the explanations of the adjustments that takes place in the economy below)
c. Faced with the favorable supply shock, if the Federal Reserve wants to stabilize output in the short-run, what should it do? What about the long-run? (draw the effect in the above graph and prepare explanation below)
d. No need to draw a graph: What's wrong if the Federal Reserve, wanting to neutralize the supply shock, decides to increase money supply?