Draw a correctly labeled aggregate demand and aggregate supply graph and show each of the following: The long-run aggregate supply curve. Current price level and output levels, labeled PLe and Ye Full employment output, labeled Yf
Assume an economy that is operating above full employment.
- Draw a correctly labeled aggregate demand and
aggregate supply graph and show each of the following:
- The long-run
aggregate supply curve . - Current price level and output levels, labeled PLe and Ye
- Full employment output, labeled Yf
a. Identify one fiscal policy action that could resolve the problem.
b. Using your graph above, show the short-run effects of the action you identified on each of the following:
-
- Aggregate demand. Explain (use the cause and effect chain you learned in the lesson)
- Output
- Price Level
c. Using a correctly labeled loanable funds graph, show the effect of the policy you identified in your resolution of the problem in section a on real interest rates.
d. Given the change in the real interest rate in c. What is the impact on each of the following?
-
- Investment
Economic growth rate. Explain- The international value of the dollar. Explain.
e. Now assume instead that the government takes no policy action to fix the problem identified in question 1.
1. In the long run, will the short-run aggregate supply increase, decrease, or remain unchanged? Explain.
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