Question: Conceptual 1. Using the aggregate supply-aggregate demand model, explain how output and prices are determined. Will output vary or stay fixed in the long run?

Conceptual 1. Using the aggregate supply-aggregate demand model, explain how output and prices are determined. Will output vary or stay fixed in the long run? Suppose the aggregate demand curve were to remain fixed: what can we infer about the behavior of prices over time?

Technical 1. Suppose that actual output is $120 billion and potential (full-employment) output is $156 billion. What is an output gap in this hypothetical economy? Based on your estimate of the output gap, would you expect the unemployment level to be higher or lower than usual?

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