1 (a) Assume the economy of Japan is currently operating at an equilibrium with high price levels and low unemployment. Draw a correctly labeled graph of the AD/SRAS/LRAS model and show:

I. Long run Aggregate Supply (2 pts)

Ii. Current equilibrium output labeled Y1 and price level labeled PL1 (2 pts)

(b) Now, assume a significant decrease in the inventory of Japanese-made auto parts. Show on your graph from part (a) how this decrease in will affect the following in the short run.

I. Real output (2 pts)

Ii. Price Level (2 pts)

(c) Let's say that, instead, Japan's government decides to take no action. What effect will this have on nominal wages in the long run? (1 pts). Explain. (2 pts)

(d) Japan's government now increases transfer payments,

I. Which component of Aggregate Demand is affected? (2 pts)

Ii. What is the effect on Japan's Long-run Aggregate Supply? (1 pt) Explain. (2 pts)