Suppose that the unemployment rate is at the natural rate of unemployment.
a. Use an AD-AS diagram to clearly and accurately show the economy's initial economic situation. This diagram should be drawn in BLACK.
b. Now suppose that in the first year there is a substantial increase in wealth and income inequality that leads to less work effort by the most productive members of a society. Assume that the effect on economic output from any changes in aggregate demand is greater than the effect on economic output from any changes in short-run aggregate supply. On your diagram above, clearly and accurately show the first year effects on this increase in wealth and income inequality on economic output and inflation. These changes should be drawn in RED.
c. Give an economic explanation of what you have shown in your diagram above. Be sure to discuss what happens to economic output and inflation and explain why these changes take place.