Option 1 For each prompt below, carefully and thoroughly follow the directions. For the graphs, be
certain to accurately label all axes, curves, and equilibria points. Use arrows to indicate the
direction of any shifts.
a. An economy is currently operating with its actual unemployment rate equal to its natural
unemployment rate. Illustrate this on a fully labeled AD-AS model, complete with
aggregate demand, short-run aggregate supply, and long-run aggregate demand.
b. A trade dispute leads to a significant decrease in net exports. On your graph from part (a),
illustrate the effect of this change.
c. Based on the change in part (b), will the unemployment rate increase, decrease, or stay
the same? Explain.
d. If the government takes no further action on the trade situation from part (b), how will
this economy adjust in the long run? Explain.
e. A different economy is operating with an inflationary gap. Illustrate this on a new fully
labeled AD-AS model, complete with aggregate demand, short-run aggregate supply, and
long-run aggregate demand.
f. On your graph from part (e), illustrate how this economy will adjust in the long run if
there is no government intervention.
g. What will happen to nominal and real wages as the economy from part (e) adjusts in the
long run?
h. If an economy increases capital investment, what will happen to aggregate demand,
short-run aggregate supply, and long-run aggregate supply in both the short run and the
long run?