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
- Identify one fiscal policy action that could resolve the problem.
- Using your graph in Part A, 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)
- Price level
- Using a correctly labeled loanable funds graph, show the effect of the policy you identified in Part B on real interest rates.
- Given the change in the real interest rate in Part D, what is the impact on each of the following?
- Economic growth rate. Explain.
- The international value of the dollar. Explain.
- Now assume instead that the government takes no policy action to fix the problem identified in part A.
- In the long run, will the short-run aggregate supply increase, decrease, or remain unchanged? Explain.