Assume the economy is operating in long-run equilibrium at the full-employment level of output. a.
Draw a correctly labeled aggregate demand and aggregate supply graph that represents this
scenario. (8 pts)
b. Suppose the economy experiences a change in consumer spending due to a sharp increase in
stock market indices and that this has increased the wealth of the nation. (4 pts)
a. i Amend the graph you drew for part (a) to show the results of the change.
b. ii Show the new equilibrium output and price level on your graph.
C. iii What type of gap exists in this economy?
d. iv Explain the effect of this change on the unemployment rate.
C. Recommend a fiscal policy action that could move the economy back to full-employment output.
(1 pt)
d. Explain the effect of the recommended fiscal policy action on (3 pts)
a. i Aggregate demand
b. ii The price level
C. iii The Real GDP