1) (6 points) Assume an economy is operating at long run equilibrium.

A) Draw an aggregate supply and demand curve that illustrates the economy mentioned above.Label equilibrium output Yp and Price Level P1

B) Assume government spending increase 1000%.Show what happens to the economy in the short run.Be sure to label any new curves, output, and price levels.

(i) Identify which curved shifted and whether it increased or decreased

(ii) Identify whether a recessionary or inflationary gap has occured

(iii) Identify if any demand pull inflation, cost push inflation, or stagflation has occurred.

C) On the same graph, show and explain how the graph will eventually "self correct" back to long run equilibrium.

2) (7 points) Assume an economy is operating at long run equilibrium.

A) Draw an aggregate supply and demand curve that illustrates the economy mentioned above.Label equilibrium output Q1 and Price Level P1

B) Assume businesses across America are paying higher costs for employee health insurance.Show what happens to the economy in the short run.Be sure to label any new curves, output, and price levels.

(i) Identify which curved shifted and whether it increased or decreased

(ii) Identify whether a recessionary or inflationary gap has occured

(iii) Identify if any demand pull inflation or cost push inflation has occurred.

C) On the samegraph, show and explain how the graph will eventually "self correct" back to long run equilibrium

NOTE: There should only be ONE graph for each situation. Thank you for your help!