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Question

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. Describe and compare both the short-run and long-run impact of the adverse supply shock on prices, output and unemployment in each country.
You may need to draw diagrams to determine the impact. However, do not provide diagrams with the answer.

Step-by-step answer

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Subject: Business, Economics

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