Assume the U.S. economy is in both short-run and long-run equilibrium, as shown in the graph below. Suppose the central bank causes the interest rates in the economy to increase.
a. Use the graph provided to show the effects on the short-run equilibrium as a result of the increase in interest rates. Draw the appropriate new AD curve or AS curve and indicate the new short-run equilibrium from the increase in interest rates.
Instructions: Use the tool provided 'AD1 Curve' or 'AS1 Curve' to plot the appropriate line. Use the tool provided 'New SR Equilibrium' to plot the short-run equilibrium.
b. Now use the graph provided to show the effects on the long-run equilibrium as a result of the increase in interest rates. Draw the appropriate new AD curve or AS curve and indicate the new long-run equilibrium from the increase in interest rates.
Instructions: Use the tool provided 'AD1 Curve' or 'AS1 Curve' to plot the appropriate line. Use the tool provided 'New LR Equilibrium' to plot the long-run equilibrium.
