Assume an economy that is initially at full employment faces a substantial increase in the factor cost of production.
1. Explain the short-run effect on output, general price level, unemployment, and the interest rate with a substantial increase in the factor cost of production.
2. Explain what kind of monetary policy can be adopted to restore the economy back to full employment equilibrium.
3. Assume the problem you discussed in part (a) relies on the self adjustment mechanism instead of the discretionary policy proposed in part (b). Analyze the possible impact of minimum wage on the self-adjustment mechanism.