Part 1

Assume the economy is in long run equilibrium. Due to an increase in the stock market, consumption has skyrocketed. The economy is now experiencing an inflationary gap.

a) graph the inflationary gap and then show how a classical economist would allow the market to "self- correct" itself. Explain how the graph operates.

b) Graph the inflationary graph and then show how fiscal policy would attempt to correct this problem. Explain which fiscal policy you used and how it affected your graph.

c) provide a detailed explanation for the graph

Part 2

The outbreak of war has caused a major drop in consumer confidence.

a) graph the recessionary gap and then show how a classical economist would allow the market to "self- correct" itself. Explain how your graph operates.

b) graph the recessionary graph and show how fiscal policy would attempt to correct this problem. Explain which policy you used and how it affected your graph below.

c) provide a detailed explanation of your graph