4. Use Figure 1 in Box 5-2 on page 109 to help you with this question.

a. In today's economy, where would you say we fall ?above or below potential GDP? Give a brief explanation.

b. Describe (i.e., demand shock due to/supply shock due to) and then depict the shocks that led to the current situation in the economy. Note in February 2020 unemployment rate = 3.5% (bls.gov) and the inflation rate = 0.1% (using a month to month percentage change bls.gov). So start from the point in the economy that this data suggests and then show the shock(s) involved to get to the result you give in part a. You should use the curved AS curve like in figure 1. Be sure to label all relevant axes, points, and curves!

c. Your book says that "policymakers must be wary of too much stimulus to avoid running the aggregate demand curve up the vertical portion of the aggregate supply curve" as the production approaches potential GDP. Why? Use a graph to help support your answer

P AD Price level AS - - Y* Y Output FIGURE 1 AGGREGATE DEMAND AND NONLINEAR AGGREGATE SUPPLY