1. The economy of Greatland is above the below full employment / full output level:

a. Using a correctly labeled graph of AD/AS,

i. label the current equilibrium GDP as Ye

ii. label the current equilibrium Price level as PLe

b. The Federal Reserve would be most concerned about .....

c. The appropriate policy would be to .....(be as specific as possible)

d. Draw and label an appropriate graph to show the effect of the actions in part ( c. ) on the nominal interest

rates.

e. Consider the results in parts ( c. and d. ) - How will this effect price level, output, and employment. Explain

2. The economy of Badlands is below the full employment / full output level with a gap of $40 Billion.

The president of Badlands was told the MPC of the country was 0.80. (*CONSIDER THE CROWDING OUT EFFECT)

The president's friend suggested that a mere $8 Billion increase in spending would bring the economy back to

full employment. Should the president listen to this friend? Explain