Question

Assume that there are two economies, A and B. Economy A is experiencing an inflationary output...

Assume that there are two economies, A and B. Economy A is experiencing an inflationary output gap, and economy B is experiencing a recessionary output gap.

  1. Illustrate the two economies in labeled graphs.
  1. Explain what will happen to wages and other factor prices in economy A and if this will increase or decrease firm's unit cost.

  1. Given your answer in (b) show the effects on the AS curve. Explain what happens to real GDP and the price level.

  1. Explain what will happen to wages and other factor prices in economy B and if this will increase or decrease firm's unit cost.

  1. Given your answer in (d) show the effects on the AS curve. Explain what happens to real GDP and the price level.

  1. Explain in which economy policy makers might use fiscal policy to restore the          economy to its long-run equilibrium position and why?
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