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25. Consider an economy operating at full employment.
a. Draw a correctly labeled aggregate supply and aggregate demand graph for the economy. On
your graph, show each of the following:
I. Equilibrium price level, labeled P1
II. Equilibrium output level, labeled Y1
b. Assume the government increase transfer payments to families with dependent children.
1. Show the effect of the increase of transfer payments on your graph
II. Label the new short run equilibrium price level P2 and the new short run
equilibrium output Y2
c. Refer to the new short run equilibrium shown on your new graph in response to part b.
1. The new short-run equilibrium illustrates what type of output gap?
II. What type of fiscal policy would be appropriate for an economy facing a persistent
gap of the type you identified in part 1?