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2. Consider aggregate supply and aggregate demand model which we've developed in class. Suppose that the IS curve has values C=10,I=4,G=8,T=4,m=21, and c=d=21, and that

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2. Consider aggregate supply and aggregate demand model which we've developed in class. Suppose that the IS curve has values C=10,I=4,G=8,T=4,m=21, and c=d=21, and that the MP curve is given by MP=1+. Suppose that the Phillips curve and Okun's law are such that =1 (in the Phillip's curve), potential output is YP=20, the natural rate of unemployment is Un=5, and expected inflation is e=5. (a) Graph the aggregate demand, aggregate supply, and long run aggregate supply curves. Also, solve for and label short run and long run equilibrium output and inflation. (b) What is the unemployment gap (between the unemployment rate and the natural unemployment rate) and the output gap (between output and potential output) in the short run equilibrium? Are these consistent with what you found in part a ? (c) Do the short run and long run equilibria coincide? If not, how will the economy adjust towards long run equilibrium? Use a graph to support your answer. 2. Consider aggregate supply and aggregate demand model which we've developed in class. Suppose that the IS curve has values C=10,I=4,G=8,T=4,m=21, and c=d=21, and that the MP curve is given by MP=1+. Suppose that the Phillips curve and Okun's law are such that =1 (in the Phillip's curve), potential output is YP=20, the natural rate of unemployment is Un=5, and expected inflation is e=5. (a) Graph the aggregate demand, aggregate supply, and long run aggregate supply curves. Also, solve for and label short run and long run equilibrium output and inflation. (b) What is the unemployment gap (between the unemployment rate and the natural unemployment rate) and the output gap (between output and potential output) in the short run equilibrium? Are these consistent with what you found in part a ? (c) Do the short run and long run equilibria coincide? If not, how will the economy adjust towards long run equilibrium? Use a graph to support your

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