Assume the economy of Globeland is currently in long-run equilibrium. In the short-run, nominal wages are fixed.

1.

A.Draw a correctly labeled graph of short-run aggregate supply, long-run aggregate supply, and aggregate demand.Show each of the following.

I.Equilibrium output, labeled Y₁

II.Equilibrium price level, labeled PL₁

B.Assume that one of Globeland's trading partners experiences a recession and begins importing less products from Globeland.

I.On your graph in part (a), show the impact of lower exports on the equilibrium in the short-run, labeling the new equilibrium output and price level Y₂and PL₂, respectively.

C.The United States government increases spending on goods and services by $100 billion, which is financed by borrowing.How will the increase in government spending affect each of the following?

I.Cyclical unemployment

II.The natural rate of unemployment

D.As a result of the increase in government borrowing because of the policy mentioned in part (c), how can this impact investment spending?

E.If the marginal propensity to save is equal to 0.25, calculate the maximum possible change in real gross domestic product that could result from the $100 billion increase in government spending.