Question 3 The fundamentals of the AS curve (a) In an economy, the goods, capital, and labor markets are in equilibrium. But on the money market, the supply of money is insufficient to support the current volume of transactions at the current price level. Among the points on the graph, which one is the economy at? Explain why. (b) At the annual negotiations of the wage, the workers adopt a soft bargaining stance and experience a decrease in their real income. Which of the effects of price on output is it? State in one sentence why workers decide to work for cheap. Show this event on the AS curve. Label axes, curves, and the before and after with A and B. (c) Copy your graph from the previous problem and add the LRAS, assuming that at A (before the workers' misstep), there were no shocks or policies in the economy. Show on the graph what kind of output gap the economy is in and how the unemployment compares to the natural rate. (d) A year of unexpectedly good weather without forest fires and hurricanes reduced the workers' commute time to work and improved communications. How does this affect the worker productivity, the firms' profit, and how do firms respond? Show the result on the AS curve. Label axes, curves, and the before and after with A and B