Problem 1: Long-Term Growth in the AD-AS Model [10 Points] This will be a graph shifting question, which asks about the intuition of both the AD-AS figures and the I-NS figures, specifically relating them to long-term growth. Suppose that the economy uses [only] two major inputs in its production: capital {K} and labour [L]. Suppose also that we are thinking about long-term growth, specifically through productivity growth. 1. Suppose that there is an increase in the productivity of input in this economy. What would we expect to happen to Y\" in the long-run? Explain your answer. [2 points] Now suppose that the Aggregate Demand (Ao) remains fixed through this period, and that we begin in long-run equilibrium. 2. If AD remains fixed, and the growth in the economy's productivity occurs, then what would happen to [i] the price level [p1, iii) Real GDP {Y}, and [iii] the price of inputs (L E: K) in the economy? Explain your answer using the AD-AS model. [2 points] Suppose that the government is concerned about stability in the price level and is concerned about the impact of this long-term growth on the long-run price level. 3. What can the Government do to maintain stability in the price level? Explain your answer using the AD-AS model. [2 points] 4. What would be the impact of your answer to the previous question on the government budget deficit? What would need to be true for this to have a negative effect on the deficit? [1 point] Assume that the budget deficit here increases. 5. What would be the impact of the change in '1\" and the increase in the budget deficit on this economy's long-term interest rates? Explain your answer using the l-NS model. [3 points]