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 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) Current price level, labeled PL1

(ii) Current 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 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.