PART I: (9 MARKS)

Japan's economy can be represented by AS-AD diagram. The economy is currently operating at its long-run equilibrium. Suppose the government decreases spending on energy plants and national defence. Everything else remaining constant, what would be the short-run impact of the decrease in spending on the price level and inflation rate, real GDP (output), the unemployment rate, and interest rates. Your answer must reflect a deep understanding of the use of the AS-AD diagram to analyse a modern economy. {Hint! DO NOT DRAW THE DIAGRAM)(9 marks).

PART II (6 MARKS)

There are four types of unemployment: structural, frictional, cyclical, and the natural rate of unemployment (NRU). For each of the following scenarios, state whether the unemployment is frictional, or, structural, or cyclical, or NRU. Explain why. Your answer must reflect the correct definition of each type of unemployment identified.

A: Johnson lost his job when the steel mill closed down. Johnson lacks the skills to work in another industry and so has been unemployed for twelve months. (2 marks)

B: Dahilia was laid off from her job as a service adviser in an automotive plant because the recession caused by the COVID-19 pandemic reduced the demand for cars. Dahilia expects to get her job back when the economy recovers from the recession. (2 marks)

C: Atta is an unskilled worker who works for local furniture moving companies during their busy seasons. Atta is unemployed for the rest of the year.(2 marks