1. consider an open economy that is in long-run equilibrium, with Y = Y*. There is then a permanent increase in the annual flow of government purchases of goods and services, G. Explain what happens in the short-run (no factor-price adjustment). Show in an AD/AS diagram.
2. Explain what happens in the long run (full factor-price adjustment). Show in an AD/AS diagram. (Assume that the current value of Y* is constant.)
3. If the increase in G leads to no long-run increase in Y, explain what will happen to national saving.Draw the investment and saving in the long run graph and show the changes.