03.07LONGRUN SELFADJUSTMENT

For each prompt below, carefully and thoroughly follow the directions. For the graphs, be certain to accurately label all axes, curves, and equilibria points. Use arrows to indicate the direction of any shifts.

1. An economy is currently operating with its actual unemployment rate equal to its natural unemployment rate. Illustrate this on a fully labeled AD-AS model, complete with aggregate demand, short-run aggregate supply, and long-run aggregate supply.
2. A trade dispute leads to a significant decrease in net exports. On your graph from part (a), illustrate the effect of this change.
3. Based on the change in part (b), will the unemployment rate increase, decrease, or stay the same? Explain.
4. If the government takes no further action on the trade situation from part (b), how will this economy adjust in the long run? Explain.
5. A different economy is operating with an inflationary gap. Illustrate this on a new fully labeled AD-AS model, complete with aggregate demand, short-run aggregate supply, and long-run aggregate supply.
6. On your graph from part (e), illustrate how this economy will adjust in the long run if there is no government intervention.
7. What will happen to nominal and real wages as the economy from part (e) adjusts in the long run?
8. If an economy increases capital investment, what will happen to aggregate demand, short-run aggregate supply, and long-run aggregate supply in both the short run and the long run?