(Solved): Consider the standard AS-AD model in Topic 4. (a) Using the AS-AD diagram and in words, analyze the ...

Consider the standard AS-AD model in Topic 4. (a) Using the AS-AD diagram and in words, analyze the impact of a decrease in the oil price in the short run (note: no need to analyse what happens in the medium run). Assume that the economy is initially operating at the natural level of output. (b) Suppose that the policymaker would like to keep output unchanged at the natural level, despite the oil price shock. Which of the two policy options, fiscal policy or monetary policy, is the better policy if the policymaker would also like to minimise the impact of the oil price shock on investment (I)? Justify your answer.