Unit 3 FRQ.pdf - FRQ#1 The economy of Country X is at full employment(a Draw a correctly labeled graph of the long-run aggregate supply short-run

Unit 3 FRQ.pdf - FRQ#1 The economy of Country X is at full...

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FRQ #1 The economy of Country X is at full employment. (a) Draw a correctly labeled graph of the long-run aggregate supply, short-run aggregate supply, and aggregate demand curves, and show each of the following. (i) Current price level, labeled PL1PL1 (ii) Current real output, labeled Y1Y1 (b) Assume that household income increases as a result of recent economic prosperity in Country X. On your graph in part (a), show the effect of the increase in household income on real output and price level. The aggregate demand curve is shifting to the right AD - AD' because of the increased household income, allowing prices to increase as well. A new equilibrium is now at PL1 and Y1. (c) What will be the effect of the change identified in part (b) on unemployment in Country X? As unemployment decreases, households are able to purchase more so production increases, and there is a demand for goods and services and workers. This creates a cycle of employment in which unemployment continues to lower and the purchasing power rises.

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