(03.01–03.08, 04.07 HC) A country is in a short-run macroeco…
(03.01–03.08, 04.07 HC) A country is in a short-run macroeconomic equilibrium. At its current output, its actual unemployment rate is less than its natural rate of unemployment. Illustrate this economy on a fully-labeled aggregate demand—aggregate supply model. Include aggregate demand, short-run aggregate supply, and long-run aggregate supply. Label the short-run equilibrium price level PLE and the short-run equilibrium output YE. Label the full-employment level of output YF. If the government and central bank do not intervene, how would this economy adjust in the long run? Explain. Illustrate the process of part (b) on your graph from part (a). The government decides to use fiscal policy to correct the economic situation in part (a). Assume the difference between the short-run and long-run equilibrium output is worth $50 billion, and the marginal propensity to consume is 0.8. Calculate one specific and effective fiscal policy action the government could take. What would be the short-run impact of the government’s action on the unemployment rate? What would be the short-run impact of the government’s action on the potential output of the economy? Will the long-run equilibrium price level if the government intervenes be less than, equal to, or greater than the long-run equilibrium price level without intervention? Show the impact of the government intervention from part (d) on the equilibrium real interest rate on a fully labeled loanable funds market graph. Will the long-run aggregate supply curve move as a result of the change from part (h)? Explain.