Question 1

For all graphs, be sure to correctly and completely label all axes and curves and use arrows to indicate the direction of any shifts.

Assume Morocco is currently operating with an unemployment rate six percent above its natural rate of unemployment.

a. Draw a correctly labeled graph of the long-run aggregate supply, short-run aggregate supply, and aggregate demand curves. i. Label the equilibrium price level PL1 and the equilibrium real output Y1. ii. Label the full-employment level of output YF.

b. Assume that instead of intervening, the government allowed the economy to self-adjust in the long run. On your graph from part (a), illustrate how the economy would self-adjust in the long run.