a. Depict an economy in a short-term equilibrium that is lower than the long-run aggregate supply of the economy. That is, show an equilibrium that has the economy operating below its potential. Show this situation graphically, including short-run aggregate demand and aggregate supply, as well as long-run aggregate supply. Explain one possible way that the economy could have arrived at this unfortunate situation.
b. In terms of major “economic indicators” (GDP, unemployment, CPI), describe in general terms what is happening in the economy described in part a. of this question.
c. List two factors, either government policy or changes in the private sector, that could increase aggregate demand, resulting in an equilibrium at full employment? Briefly describe how each might work.
d. If no changes in aggregate demand lift the economy back to full employment, what might hinder or even prevent reaching full employment solely through changes in aggregate supply?
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