1) The economy is in a recession with high unemployment and low output (i.e. the output currently is lower than the natural level of output)
a) Draw a graph of aggregate demand and aggregate supply to illustrate the current situation. Be sure to include the aggregate-demand curve, the short-run aggregate supply curve and the long- run aggregate supply curve. Label this equilibrium point A.
b) Identify an open-market operation that would restore the economy to its natural rate. Draw a graph of the money market to illustrate the effect of this open-market operation. Show the resulting change in interest rate.
c) For the open-market operation you've identified in b), draw a graph similiar to a) to show the effect on the output and price-level. Briefly explain in words why the policy has the effect that you have shown in the graph. (For the graph, label the initial equilibrium point A and the final equilibrium point B