(Solution) - Suppose that a permanent increase in oil prices both creates -(2025 Original AI-Free Solution)

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Suppose that a permanent increase in oil prices both creates an inflation shock and, at the same time, reduces potential output. Use an AD-AS diagram to show the effects of the oil price increase on output and the inflation rate in the short run and the long run in the following two cases:
a. The government does not engage in stabilization policy.
b. The government cuts taxes and increases government spending