Question
(a) (15 points) No Policy Intervention: Suppose that the economy starts at a long-run equilibrium and that the short-run aggregate supply curve has a positive
(a) (15 points) No Policy Intervention: Suppose that the economy starts at a long-run equilibrium and that the short-run aggregate supply curve has a positive slope. Now suppose that the government increases Government Expenditures (G).
Using the model of aggregate demand and aggregate supply and the Phillips curve to illustrate graphically the impact of this increase in Government Expenditures (G) in the short run and in the long run if you let the economy adjust by itself. Be sure to label the axes, the curves, the initial equilibrium values, the direction the curves shift, the short-run equilibrium values, and the longrun equilibrium values. Explain what happens to prices, output, inflation, and unemployment in the short run and the long run.
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