Use the AD-AS model to answer this question. For each situation below assume that the AD-AS model is initially in long run equilibrium. Each answer must be supported with a diagram.
(a) Suppose that the government in this economy goes to war. What do you predict will happen to real GDP and inflation in the short run? Holding everything else constant, what do you predict will happen to real GDP and inflation in the long run? Explain your answer.
(b) Suppose the government reduces taxes and at the same time a new oilfield has been discovered inthe economy. Holding all else constant what do you predict will happen to real GDP and inflation in the short-run and the long-run. Explain your answer.