Assume that a country's economy is in short-run equilibrium and the actual unemployment rate is lower than the natural rate of unemployment. A.  Using a correctly labeled graph of the long-run aggregate supply curve, short-run aggregate supply curve, and aggregate demand curve, show each of the following:      i.  Current price level, labeled P1, and current output level, labeled Y1      ii.  The full employment output level, labeled Yf B.  What open market operation can the country's central bank use to move the economy toward its long run equilibrium? C.  Use a correctly labeled money market graph to show how the country's central bank action to move the economy toward its long-run equilibrium affects the equilibrium nominal interest rate in the short run.

Assume that a country's economy is in short-run equilibrium and the actual unemployment rate is lower than the natural rate of unemployment.

A.  Using a correctly labeled graph of the long-run aggregate supply curve, short-run aggregate supply curve, and aggregate demand curve, show each of the following:

     i.  Current price level, labeled P1, and current output level, labeled Y1

     ii.  The full employment output level, labeled Yf

B.  What open market operation can the country's central bank use to move the economy toward its long run equilibrium?

C.  Use a correctly labeled money market graph to show how the country's central bank action to move the economy toward its long-run equilibrium affects the equilibrium nominal interest rate in the short run.

D.  Based on the interest rate change from Part C, will each of the following increase, decrease, or remain the same in the short run?

     i.  Real output.  Explain.

     ii.  Natural rate of unemployment

E.  Assume instead that the central bank does not pursue the monetary policy action from Part B and there was no other government intervention.  Will each of the following increase, decrease, or remain the same in the long run?

     i.  Short run aggregate supply.  Explain.

     ii.  Employment