1. Assume that an economy is initially at a long-run equilibrium. Suppose that there is an unexpected decrease in consumption (C). Use the model of aggregate demand and aggregate supply (using the upward-sloping short-run aggregate supply curve) and the Phillips curve to illustrate graphically the short-run and the long-run effects of this change. At the end,

a.-the equilibrium inflation will be higher but unemployment will remain the same.

b.-the equilibrium inflation will be lower but unemployment will return to its natural rate.

c.-the LRPC will shift to the right.

d.-the LRPC will shift to the left.

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 a negative supply shock hits the US. Using the model of aggregate demand and aggregate supply and the Phillips curve illustrate graphically the impact in the short run and in the long run of this negative supply shock when there is No Policy Intervention. Be sure to label the axes, the curves, the initial equilibrium values, the direction the curves shift, the short-run equilibrium values, and the long-run equilibrium values. At the end,

a.- the equilibrium inflation will be higher but unemployment will remain the same.

b.- the equilibrium inflation will be lower but unemployment will remain the same.

c.- the equilibrium inflation and unemployment will return to their initial values.

d.- the LRPC will shift to the left.

Policy Intervention: Suppose that you are an economist working for the Treasury Department (thus, you can only use fiscal policy tools) when this negative supply shock is observed. Using the model of aggregate demand and aggregate supply and the Phillips curve illustrate graphically your policy recommendation to accommodate this adverse supply shock, assuming that your top priority is maintaining full employment in the economy. 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. At the end,

a.- the equilibrium inflation and unemployment will be both higher.

b.- the equilibrium inflation and unemployment will be both lower.

c.- the equilibrium inflation will be lower but unemployment will return to the natural rate.

d.- the equilibrium inflation will be higher but unemployment will return to the natural rate.

Each Question has to be labeled with the graphs