Suppose a terrorist group launches a coordinated series of attacks on major oil production facilities in Kuwait and Saudi Arabia. These attacks temporarily interrupt the flow of Saudi and Kuwaiti oil to world markets. Further, assume that this generates a massive increase in world oil prices, roughly doubling the price of West Texas Intermediate crude oil (an important benchmark price of oil). Assume this is unanticipated.
Show and EXPLAIN what would happen in the short-run and the long-run to U.S. real GDP and the aggregate price level, other things constant, using our AD-AS framework. Explain which curves shift and why. Label curves clearly. Identify the new equilibrium in the short-run and the long-run.
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