03.05EQUILIBRIUM IN THE AGGREGATE DEMANDAGGREGATE SUPPLY (ADAS) MODEL

Read each direction below carefully and make certain you fully label any graphs, including equilibrium price level and aggregate output.

(a) An economy is currently operating in long-run equilibrium. Draw a graph of its short-run aggregate supply, aggregate demand, and long-run aggregate supply. Label the equilibrium price level and the full-employment output YF.

(b) If the natural rate of unemployment in this economy is 4 percent and the frictional unemployment rate is 3 percent, what must be the structural unemployment rate?

(c) Draw a new graph that shows an economy operating with an inflationary gap. Include the SRAS, AD, and LRAS. Label the equilibrium price level, real output level, and full employment output YF.

(d) The economy from part (c) is in short-run equilibrium. If the aggregate quantity of output demanded in this economy is $3 trillion, what must the aggregate quantity of output supplied?

(e) Is the long-run aggregate supply for this economy below, equal to, or above $3 trillion? Explain.