1. i) If the economy faces a high unemployment rate (GDP is below its potential), could a DROP in wages help to bring the economy back to full employment?

ii) If the economy faces a high unemployment rate (GDP below isa potential level), could an INCREASE in wages help to bring the economy back to full employment?

iii) (Speak with a friend or a relative and ask what they suggest the government should do in order to decrease the high unemployment rate in Spain. Using the tools learned in class, do you think the suggestion is a Kournikova argument (sounds good but plays bad)?

1. Predict the impact on the aggregate demand if there is: i) an equal increase in govern ment purchases and taxes (Hint: if you think that both effects cancel out, think more carefully...) ii) If the economy is at equilibrium, then the economy is at full employment (i.e. potential level of GDP). Is this statement true or false?