Suppose that an economy is in a long-run equilibrium.

1. Illustrate the state of the economy. Be sure to label the graphs correctly

. 2. Now, suppose that the price of imported products increases. Use your graph to show what happens to the equilibrium price and output in the short run and in the long run.

4. Suppose that the government decides to build more infrastructure. Would the effect on aggregate demand be larger if the central bank held the money supply constant in response or if the central bank chose to maintain a fixed interest rate? Illustrate and explain