Chapter 26, Problem 2SCQ

Legislation proposes that the government should use macroeconomic policy to achieve an unemployment rate of zero percent, by increasing aggregate demand for as much and as long as necessary to accomplish this goal. From a neoclassical perspective, how bill this policy affect output and the price level in the short nm and in the long run? Sketch an aggregate demand/aggregate supply diagram to illustrate your answer. Hint revisit Figure 26.4.