Assume that the economy of country Alpha is operating at the full-employment equilibrium. a. Using a correctly labeled graph of aggregate demand, short-run aggregate supply, and long- run aggregate supply, show the equilibrium, labeling the equilibrium price level as PL1 and the equilibrium output as Y1. b. Now assume the economy of country Beta, a major trading partner of Alpha, enters a recession. On your graph from part (a), show the effect of country Beta's recession on each of the following in country Alpha in the short run. i. Aggregate demand. Explain ii. Real output and price level, labeled as Y2 and PL2. c. The central bank of Alpha wishes to offset the effect of Beta's recession on Alpha's real output. Assume the banking system in Alpha has ample reserves. What monetary policy action should the central bank of Alpha take? d. Draw a correctly labeled graph of the reserve market for Alpha, and show the effect of the monetary policy action you identified in part (c) on the policy rate in the short run.
