Use the AS/AD framework to depict an economy that is a) in equilibrium, and b) has an Unemployment Rate that is greater than its Natural Rate of Unemployment.
A. Suppose that the Business Sector decides to decrease its Profit Margin. Illustrate in your graph the effects of this event on the economy. Follow the same 4-step procedure you did in Problem
Don’t forget to label the new equilibrium Price Level as PL(1) and the new equilibrium level of Real GDP as Q(1). Also, label explicitly any curve(s) that shift as a result of this event.
B. Now that you have completed the graphical depiction of this event, use it to answer the following: As a result of this event and its aftermath, has this economy experienced
1) economic growth? (YES or NO)
2) a rise, fall, or no change in its Unemployment Rate?
3) inflation or deflation?
4) a rise, fall, or no change in its level of Exports?