1. Suppose you have the followingAD and AS curves:

Y = 800 40(AD equation)

Y = 50 + 60(Short Run AS equation)

Y = 400 billion(Long Run output)

(a)Calculate the real GDP and inflation in equilibrium in the short run.Calculatethe current output gap.

(b)Is the economy in the short run facing a recession or an expansion?Explain.

(c)Was the recession or expansion caused by demand or a supply shock?Explain.

(d)If the AD and Long Run output do not change, what should happen to the short-run AS curve in the long run?What would happento the expected inflation rate in the long run?

(e)Calculate the expectedinflation in the long run, and obtain the new adjusted short-run aggregate supply curve