Assuming the economy has a strong-form market and that the current economy has reached its long-term equilibrium with optimal inflation rate = 3 (%) and the aggregate output y = 10 (bil). The economy has the following AD-AS curves:

I. AD Curve: = 10-0.7y

II. AS Curve: = 1+0.2y

III. LRAS Curve: y = 10

Now, the central bank intends to use monetary policy to boost economic growth and suggest the government to increase 1bil in government expense. You are a researcher and now reviewing effect increased expense.

a. What is the short-term equilibrium of and y?

(20 marks)

b. What is the long-term equilibrium of and y?

(20 marks)

c. What is the new AS curve? Do you think central bank's suggestion on monetary policy effective?

(10 marks)