The economy of Moneyland has an actual unemployment rate that is less than the natural unemployment rate. (a) Draw a correctly labeled graph of the long-run aggregate supply, short-run aggregate supply, and aggregate demand curves, and show each of the following.
(i) Current price level, labeled PL1
(ii) Current real output, labeled Y1
(iii) Full-employment output, labeled YF
(b) Suppose that investment spending on plant and equipment increases. On your graph in part (a), show the effect of the increase in investment spending on the equilibrium price level and real output in the short run.
(c) Identify one fiscal policy action the government of Moneyland can use to restore full employment.
(d) Assume instead that the government of Moneyland decides not to take any policy action. Will short-run aggregate supply increase, decrease, or stay the same in the long run? Explain.