Assume that a country's economy is in a short-run
equilibrium and the actual unemployment rate is lower than
the natural rate of unemployment.
a Using a correctly labeled graph of the long-run
aggregate supply curve, short-run aggregate supply curve,
and aggregate demand curve, show each of the following.
i Current price level, labeled PL., and current
output level, labeled Y.
i The full-employment output level, labeled YE.
b. What open-market operation can the country's central
bank use to move the economy toward its long-run
equilibrium?
c. Use a correctly labeled money-market graph to show
how the country's central bank action to move the economy
toward its long-run equilibrium affects the equilibrium
nominal interest rate in the short run.
d. Based on the interest rate change from part (c), will
each of the following increase, decrease, or remain the
same in the short run?
i Real output Explain
Natural rate of unemployment
e. Assume instead that the central bank does not pursue
the monetary policy action from part (b) and there was no
other government intervention. Will each of the following
increase, decrease, or remain the same in the long run?
i Short-run aggregate supply. Explain.
. Employment
