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Consider a small open economy Beta which imports oil for its own consumption and

Consider a small open economy Beta which imports oil for its own consumption and also production. Recently oil price has increased due to instability in the major oil producing economies. Assume this increase in oil price will not affect the potential output of Beta. Using the aggregate demand and aggregate supply (AD-AS) framework, explain the short run and the long run effects on the inflation rate and the real GDP of Beta with the oil price increases. (4 marks) How will your answer be different from (i) if the central bank is always prepared to implement monetary policy to maintain full employment in the economy? Is it a better outcome for the central bank to intervene?

Feb 07 2020 View more View Less

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