Assume that the United States economy is operatingabove fullemployment.

(a) Draw a correctly labeled graph of long-run aggregate supply, short-run aggregate supply, and aggregate demand, and show each of the following.

(i) Current equilibrium output and price level, labeled as Y₁ and P₁

(ii) Full-employment output, labeled as Y_f

(b). Assume that the marginal propensity to consume is 0.8 and the value of theinflationary gap (x-axis) is$100 billion.

(i) If the government changes its spending without changing taxes to eliminate theinflationary gap, calculate the minimum required change in government spending.

(ii) If the government changes taxes without changing government spending to eliminate the inflationary gap, will the minimum required change in taxes be greater than, smaller than, or equal to the minimum required change in government spending in part (b)(i)?Explain.

(c) Assume the governmentraisesincome tax rates to eliminate theinflationary gap. Will each of the following increase, decrease, or stay the same?

(i) Aggregate demand. Explain.

(ii) Long-run aggregate supply. Explain.

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a i The current equilibrium output and price level Y1 P1 will be where the shortrun aggregate supply ... View the full answer