1. The unemployment rate in the country of Greatland is currently 3% and the natural rate of unemployment is 5%.

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 president of Greatland received advice to decrease wasteful military spending.

i. How would this affect price level? -Explain

ii. Use a correctly labeled graph to show how the change in spending and price level would affect

interest rates.

iii. Assume that with the change in spending, there was a crowding out or crowding in effect. Return to

your graph in part a and show the outcome of the change in spending along with crowding out or

crowding in effects.

iv. Explain how the change in spending led to the crowding out or crowding in effect.