Exercise 2 Consider an economy with the folowing schedules of aggregate demand and short run aggregate supply curves. The current airported inflation rate in 5% Aggregate Quarary Accragate quantity Aggregate quantity Dermarried Supplied when Supplied when the dermarrdied. when G- Axpachad linfattion when G 20 mano = 5% Inflation rate = 2% (2) (3) (4 -1 108 106 104 102 90 94 100 92 97 99 96 86 100 94 102 100 104 Answer the following questions. Justity your answers using concepts developed in class a) Drew carefully on a diagram the short run aggregate demand SAD curve corresponding to G= 20 and the short run aggregate SAS curve corresponding to an expected Inflation rate equal to 5%. What is the full employment real GDP? b) Find the short run equilibrium real GDP, Inflation rate, and the growth rate of nominal wages. Is there a deflationary gap or an inflationary gap or neither? Is the equilibrium inflation rate equal to the expected inflation rate? What is full employment real GDP? Suppose that government expenditures decrease by 12 from 20 to 8 . c) Fill out column (3) of the Table. Find the new short run equilibrium real GDP, Inflation rate, and the growth rate of nominal wages. d) is there a deflationary gap, an inflationary gap or neither? What happened to the real wage, only the direction of change is required for the real wage change? Compare your answers to b) and c). Explain how the economy could operate and produce a GOP that is different from its full employment level as in c). After experiencing the new equilibrium inflation rate and its effect on their real wage, workers realize that the equilibrium inflation rate has changed, and their real wage has changed. Suppose that they change their expected Inflation rate and accept to lower the growth rate of nominal wage by the same amount as the change in the equilibrium inflation rate. e) What motivates the workers to accept this change in their expected Inflation rate? f) Find the new equilibrium real GDP and inflation rate. Now Is there a deflationary gap, an inflationary gap or neither? What happened to the gap