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Identify a recessionary or inflationary gap

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Assume an economy is operating at long run equilibrium. A) Draw an aggregate supply and demand curve that illustrates the economy mentioned above. Label equilibrium output Yp and Price Level P1 B) Assume government spending increase 1000%. Show what happens to the economy in the short run. Be sure to label any new curves, output, and price levels. (i) Identify which curved shifted and whether it increased or decreased. (ii) Identify whether a recessionary or inflationary gap has occurred. (iii) Identify if any demand pull inflation, cost push inflation, or stagflation has occurred. C) On the same graph, show and explain how the graph will eventually "self correct" back to long run equilibrium.

Reference no: EM133065869

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