Assume that the United States economy is currently at long$-$run equilibrium, with $4\%$ unemployment and $2\%$ inflation.

a$.$ Draw a correctly labeled graph of aggregate dem and, short$-$run aggregate supply and long$-$run aggregate supply, indicating full$-$employm ent GDP $(($:$Y_{}\}$ and the current price level $($PL $P{L}_0).$

b$.$ Now assume that Canada, a major trading partner of the United States, experiences a recession.

i$.$ Indicate the effect of Canada's recession on your graph in part a$).$ Label the new price level $P{L}_1$ and the new output level $Y_1.$

ii$.$ Will the new unemployment rate in the U$.$S$.$ increase, decrease, or rem ain the same?

c$.$ What fiscal policy action can the U$.$S$.$ government use to restore long$-$run equilibrium after the recession in Canada?

d$.$ Now assume that instead of the government using a fiscal policy action, the Federal Reserve uses open$-$market operations to stabilize the economy.

i$.$ What open$-$market operation would the Fed undertake?

ii$.$ Draw a correctly labeled graph of the m oney $m$ arket. Indicate the effect of your open$-$market operation on nominal interest rates.

e$.$ Draw a correctly labeled graph of the for eign exchange market for U$.$S$.$ doll ars $($USD$).$

i$.$ Illustrate the effect of the Canadian recession on the value of the USD.

ii$.$ Based on the change in the international value of the USD that you identified in part e$)$i$),$ will Americans buy more, less, or the same amount of Canadian exports?

$(11$ points$)$