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2. (14 marks) Assume that a closed economy called Econland is currently in boom. a. Draw a correctly labeled AD-AS diagram. Show the current output
2. (14 marks) Assume that a closed economy called Econland is currently in boom. a. Draw a correctly labeled AD-AS diagram. Show the current output and the natural rate of output and label them Y1 and Y, respectively. Show the short- run equilibrium on the diagram and label it A. (2 marks) b. What happen to the unemployment rate at A as compared to the natural rate of unemployment? What is the sign of cyclical unemployment? Is it positive or negative. Please circle the answers below. (2 marks) Answers: Unemployment rate compared to natural rate of unemployment is : Larger The same Smaller Cyclical unemployment is: Positive Negative c. Assume that policymakers take no action, how does the economy cool down on its own to go back to long run equilibrium? What will happen to the price level and output? Show the new equilibrium on the diagram in part (a) and label it B. (4 marks) Answers: Price level will and output will 11
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