Econ 4th Edition by William McEachern

Exercise 2

PROBLEMS WITH ACTIVE POLICY Use an AD-AS diagram to illustrate and explain the short-run and long-run effects on the economy of the following situation: Both the natural rate of unemployment and the actual rate of unemployment are 5 percent. However, the government believes that the natural rate of unemployment is 6 percent and that the economy is overheating. Therefore, it introduces a policy to reduce aggregate demand.