A country has a natural rate of unemployment of 4 percent, an actual rate of unemployment of 8 percent, and an inflation rate of 4 percent.
 

With the data provided above, draw a fully labeled graph of the short-run and long-run Phillips curves for the country above. Label the short-run equilibrium B. Make sure and label the numerical values provided.

 

If the government takes no action, will the short-run aggregate supply curve shift left, shift right, or not move? Explain.

 

If this country's government takes no action to reduce cyclical unemployment, will the long-run Phillips curve shift left, shift right, or not move? Explain.

 

What is one fiscal policy action that could reduce the unemployment rate in the short run?

 

Assume the policy from part (d) is completely effective. Illustrate the impact of the action from part (d) on the price level and real output with a graph of the aggregate demand and short-run aggregate supply.

 

Assume there is a flexible exchange rate system. As a result of the effect on real GDP from the fiscal policy in part (d), will the currency of this country above appreciate, depreciate, or not change in value in the foreign exchange market?