a) On a fully labelled AD/AS diagram, which shows that the economy is experiencing an inflationary gap, demonstrate what would happen if interest rates increase. Was the policy successful?

b) On a fully labelled AD/AS diagram, which shows that the economy is experiencing a recessionary gap, demonstrate what would happen if a new technology is introduced that makes workers more efficient.

The MPC for a closed economy is 0.75. Autonomous consumption is $500, investment is $300, and government spending is $400.

a) What is the equilibrium level of real GDP?

b) If business increases planned investment expenditure by 300 to 400, what is the new equilibrium

real GDP?

c) What is the slope of the AE function in this economy and the value of the multiplier?