5. To fight an ongoing 10% inflation, the government makes raising wages or prices illegal. However, the government continues to increase the money supply (and hence aggregate demand) by 10% per year. The economy starts at full-employment output, which remains constant.

a. Using the Keynesian AD–AS framework, show the effects of the government’s policies on the economy. Assume that firms meet the demand at the fixed price level.

b. After several years in which the controls have kept prices from rising, the government declares victory over inflation and removes the controls. What happens? 6. How would each of the following likely affect the natural unemployment rate?

a. A new law prohibits people from seeking employment before age eighteen.

b. A new Internet service, Findwork.com, makes it easy for people to check on the availability of jobs around the country.

c. The length of time that unemployed workers can receive government benefits increases from six months to one year.

d. A shift in the public’s buying habits greatly expands the demand for sophisticated consumer electronics while reducing the demand for traditional consumer goods and services, such as clothing and restaurant meals.

e. Tight monetary policy, introduced to get the inflation rate down, drives the economy into a recession.