Suppose the economy of Bradyland has an unemployment rate that is above the natural rate of unemployment. In the short run, nominal wages are fixed.

1.Draw a correctly labeled graph of short-run aggregate supply, long-run aggregate supply, and aggregate demand. Show each of the following.

(a) Equilibrium output, labeled Y1

(b) Equilibrium price level, labeled PL1

2.Assume that there is an increase in exports from Bradyland. On your graph in Problem 10, show the effect of higher exports on the equilibrium in the short run, labeling the new equilibrium output and price level Y2 and PL2, respectively.

3.Based on your answer in Problem 2 , what is the impact of higher exports on real wages in the short run? Explain.

4.As a result of the increase in exports, export-oriented industries in Andersonland increase expenditures on new container ships and equipment.

(a) What component of aggregate demand will change?

(b) What is the impact on the long-run aggregate supply? Explain.