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Question 1 (25 Points). AS-AD Model (see topic 7): The figures be- low show the AS-AD model, depicting GDP on the horizontal axis and the economy's overall price level on the vertical axis. The AS (aggregate supply) curve shows firms' willingness to produce final goods and services; the AD (aggregate demand) curve shows economy-wide demand for final goods and services. A macroeconomic equilibrium occurs at the intersection of the AS and AD curves. At the equilibrium depicted in situation A, there is a large gap between the equilibrium output and the potential GDP (potential out- put). At the equilibrium depicted in situation B, the economy is operating close to its potential GDP. Situation A Situation B P (Price Level) P (Price Level) AD-Curve AD-Curve AS-Curve AS-Curve Potential Potential GDP GDP Y (GDP) Y (GDP) (a) Describe the effects of expansionary monetary policy on GDP (Y) and price level (P) for situation A and for situation B. Do the effects differ between the two situations? (b) The so-called Phillips curve (named after economist William Phillips) posits that low unemployment tends to lead to higher inflation. Is this observation in line with the AS-AD model? Explain your