Assume that the current unemployment rate in Country A is lower than the natural rate of unemployment. Draw a single correctly labeled graph with both the long-run Phillips curve and the short-run Phillips curve. Label the current short-run equilibrium point Z. Identify a specific fiscal policy action that would bring the economy to full employment. Draw a correctly labeled graph of the loanable funds market, and show the effect of the fiscal policy from part (b) on the real interest rate in the short run. Now assume instead that there is no fiscal policy action. Will the short-run Phillips curve shift to the right, shift to the left, or remain the same over time? Explain.
Assume that the current
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Draw a single correctly labeled graph with both the long-run
Phillips curve and the short-run Phillips curve. Label the current short-run equilibrium point Z. -
Identify a specific fiscal policy action that would bring the economy to full employment.
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Draw a correctly labeled graph of the loanable funds market, and show the effect of the fiscal policy from part (b) on the real interest rate in the short run.
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Now assume instead that there is no fiscal policy action. Will the short-run Phillips curve shift to the right, shift to the left, or remain the same over time? Explain.
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