In Vistulaland a closed economy with government and in long-run equilibrium, the governme decided to increase its spending *) Present the initial long-run equilibrium and the short-run equilibrium after the government spending increase on the graph below using the AD-AS model (Keynesian in the short run a Classical in the long run) Remember to denote the axes, schedules. b) Explain if output changes in the short run and if yes, what makes this change possible c) Describe (preferably in points) the adjustment process in this economy between the short-run and the new long-run equilibrium. Concentrate especially on describing what happens to the nominal and real interest rates, nominal and real wages, output, inflation and private spending. Assume that the bank decides not to maintain its inflation target. d) On the graph below show and explain the reaction of the central bank to the expansionary fiscal policy described above, i.e. from the beginning of the adjustment process to the new long-run equilibrium. (Hint: use the ii curve, remember to denote the axes, curve, etc.)

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