Q1. Supply-side effects of fiscal policy (8 points) i) Consider an economy at point 2 in the graph below. Suppose the government decides to decrease government expenditure & to move the economy to a long-run equilibrium. Shift a single curve to show the effect of the decrease in G, using an arrow indicate which direction the curve has shifted. Label the new long-run equilibrium as point 3. IUse the line/dots to draw the change. You can insert new lines/copy the line for more lines; rotate it for AS curves; you can insert text or use the box for labeling) Box for labeling LRAS AD YP Y ii) Now suppose instead that the government increases the payroll tax, again with the objective of moving the economy to a long-run equilibrium. Assume that the change in the payroll tax has a short-run supply-side effect, but no long-run supply-side effect. Shift two curves in the graph below to show the effect of the payroll tax increase (hint: Ricardian Equivalence is not considered here). Label your new curves and use arrows to indicate in which direction each curve has shifted. Label the new long-run equilibrium as point 3. LRAS AS 2 AD VP "i) Compare the level of inflation in the long-run equilibrium from parts (i) and (ii) of the question. Compared to a decrease in government expenditure, does raising the payroll tax result in higher, lower, or the same level of inflation? Write your answer (higher, lower, or same) here