Problem
Draw a basic AD and SRAS graph (with LRAS constant) that shows the economy in the long-run equilibrium. Suppose that the war between Ukraine and Russia sharply increased the price of petroleum, causing the unit cost per output in the economy to increase. ***If you have any trouble to draw a graph, you can answer the question without a graph. If then, your answer should include all the necessary steps, not just the final outcome.
1) Using the AD-AS model, briefly analyze the short-run effects of the war on equilibrium real GDP and the price level, either with a AD-AS diagram or without a diagram.
2) How does the economy adjust back to long-run equilibrium? Briefly explain (either with a AD-AS diagram or without a diagram).