Question

An oil cartel effectively increases the price of oil by 100% causing a shock in oil consuming countries A and B. The FED in country A takes immediate action increasing the money supply, while FED in inflationary country B does not take any action. In the long run you would expect that: a. Both countries return to their long-term stable equilibrium (Y and unemployment) but with a higher price level b. Both countries return to their long-term stable equilibrium, but country A will remain with a higher price level than country B c. Both countries return to their long-term stable equilibrium, but country B will remain with a higher price level than country A d. Country B will never return to its long-term equilibrium

Answer 1

When an oil cartel effectively increases the price of oil by 100% causing a shock in oil consuming countries A and B.

The FED in country A takes immediate action increasing the money supply, while FED in inflationary country B does not take any action

In this case, in long term "Both countries return to their long-term stable equilibrium, but country A will remain with a higher price level than country B".

What is Federal Reserve System (FED)?

The nation's central banking system is the Federal Reserve System, usually referred to as the Federal Reserve or just the Fed.

The Fed offers a secure, adaptable, and stable monetary and financial system to the nation.

The Fed's primary responsibilities include-

• overseeing and regulating banks,
• implementing national monetary policy,
• preserving financial stability, and
• offering banking services.

Therefore, to better understand the effects of financial services laws and practices on customers and communities, the Federal Reserve promotes supervision, community reinvestment, and research.

To know more about  monetary policy, here

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