3. Problems and Applications Q4 Suppose the economy is in a long-run equilibrium, as shown on the following graph. Now suppose a fall in government purchases reduces aggregate demand. On the following graph, shift a curve or adjust the point to reflect the short-run effect of reduction in government purchases. SRPC Short-Run Effect LRPC Inflation Rate Unemployment Rate SRPC LRPC If the Fed undertakes expansionary monetary policy, it return the economy to its original inflation rate and original unemployment rate. Now, suppose the economy is back in long-run equilibrium, and then the price of imported oil rises. On the following graph, shift a curve or adjust the point to reflect the short-run effect of the increase in the price of oil. SRPC Short-Run Effect LRPC Inflation Rate Unemployment Rate SRPC LRPC True or False: If the Fed undertakes expansionary monetary policy, it can return the economy to its original unemployment rate but the inflation rate will be higher. True False