1. Assume that the economy is operating below the fullemployment level of output and that the governments budget is balanced. {a} Using a correctly labeled aggregate demand and aggregate supply graph. show how an increase in government spending will affect each of the following in the short run. {i} Fteal output [iii Price level to} Explain how this increase in government spending will affect each of the following in the short run. {i} Real interest rates (ii) Investment Now assume that instead of increasing government spending. the government decreases corporate-prots taxes. {c} Using a correctly labeled aggregate demand and aggregate supply graph. show and explain how this decrease in corporate-profits taxes will affect each of the following. {i} Aggregate demand {iii Long-run aggregate supply {iii} Real output [iv] Price level 2. Explain how each of the following will affect longrun aggregate supply {potential real gross domestic product}. {a} A decrease in the labor force participation rate lb} An increase in the government deficit following a reduction in personal income taxes to} A decrease in the quantity of inputs required to produce a unit of output {of} An increase In the quantity and quality of education {a} An increase in the rate of savings 3. Labor productivity is output per unit of labor. An increase in labor productivity is a source of economic growth. fa} Identify two sources of increase in labor productivity. lb) Assume that a country's economy is at full employment. Productivity has been rising. Using a correctly labeled graph of aggregate demand and aggregate supply. show the long-run effect of the growth in productivity on each of the following. {i} Real output {iii Price level to} Assume that the economy produces only two goods. good X and good Y. Using a correctly labeled production possibility diagram, show the effect of the increase in labor productivity