Assume that the U.S. economy is in long-run equilibrium.
(a) Draw a diagram to illustrate the state of the economy. Be sure to show aggregate demand, short-run aggregate supply, and long-run aggregate supply.
(b) Now suppose that due to firms' expectations of a stronger economy, firms' investment increases significantly. Use your diagram to show what happens to output and the price level in the short run. So what happens to the cyclical unemployment rate and the Natural Rate of Unemployment (NAIRU)?
(c) Assume the government and central bank do not change their policies. Explain what will happen to output and the price level in the long run.