(b) Explain, with the aid of three separate IS-LM-FE diagrams, how this will affect real output, real interest rate and the general price level in three steps: (i) before the general price level adjusts; (ii) when the general price level is adjusting; (iii) after the price adjustment process is completed. Is the general price level increasing or decreasing during the price adjustment process? Explain the intuition of your answer with reference to the AD-AS framework.
Part B
Consider an economy that experiences an outflow of working age people and a decline in
labour supply
(a) Explain, with the aid of the labour-market-equilibrium diagram, how this will affect the equilibrium
real wage and the full-employment level of employment.
(b) Explain, with the aid of three separate IS-LM-FE diagrams, how this will affect real output, real
interest rate and the general
(i) before the general price level adjusts;
(ii) when the general price level is adjusting;
(iii) after the price adjustment process is completed.
Is the general price level increasing or decreasing during the price adjustment process? Explain the
intuition of your answer with reference to the AD-AS framework.
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