Include correctly labeled diagrams, if useful or required, in explaining your answers. A
correctly labeled diagram must have all axes and curves clearly labeled and must show
directional changes. If the question prompts you to "Calculate," you must show how you
arrived at your final answer.
The economy of Country X is in equilibrium at full employment.
(a) Draw a correctly labeled graph of the long-run aggregate supply, short-run aggregate
supply, and aggregate demand curves, and show each of the following.
(i) The current equilibrium price level, labeled PL₁
(ii) The current equilibrium real output, labeled Y₁
(b) Assume that household income increases as a result of recent economic prosperity in
Country X. On your graph in part (a), show the effect of the increase in household income on
real output and the price level.
(c) What will be the effect of the change identified in part (b) on unemployment in Country X?
(d) Will the change in real output shown in part (b) be smaller or larger in the presence of
automatic stabilizers? Explain.