Jnit $3$ Test

Assume the US economy is currently at long run equilibrium.

a$.$ Draw a correctly labelled graph of aggregate demand and aggregate supply and show each of the following

i$.$ The long run aggregate supply curve

ii$.$ The current equilibrium output and price levels, labelled as Ye and PLe respectively

b$.$ Assume the government increases spending on national defense without rasing taxes.

i$.$ On your graph from part a$)$ show how the government action affects aggregate demand

ii$.$ How will this government action affect the unemployment rate in the short run? Explain