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Suppose the economy is in a long-run equilibrium. Then, suppose the price of imported oil rises...

Suppose the economy is in a long-run equilibrium. Then, suppose the price of imported oil rises sharply. Discuss the effects of this shock in the short- run. If the Central Bank undertakes an expansionary policy, can it return the economy to its original output and original unemployment rate?
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Answer : Based on given information initially the economy is in long run equilibrium. Now if negative supply shock occur in imported oil market then the price of imported oil will increase. This will decrease the economy's aggregate demand which will shift the economy's aggregate demand curve to leftwatd. As a result, in short run the economy will face a recessionary gap situation. Now if Central Bank take expansionary monetary policy then people will get more money on their hand to spend and invest. This will increase the aggregate demand of economy. As a result, the aggregate demand curve shift to rightward and the economy reach back at it's original output and original unemployment rate.

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