Use the AS/AD framework to depict an economy that a) is in equilibrium, and b) has an Unemployment Rate that is less than its Natural Rate of Unemployment.

A. Suppose that Real GDP in the Rest-of-the-World (the ROW) begins to fall.

B. Illustrate the effects of this event on the economy. Follow the same 4-step procedure you did in Problems 3 and 4. Don’t forget to label your results. This means (among other things) that you must label the new equilibrium Price Level as PL(1), the new equilibrium level of Real GDP as Q(1), and label explicitly any curve(s) that shift.

C. Now that your graphical depiction of this event is complete, use it to answer the following: As a result of this event and its aftermath, has this economy experienced

1) a rise, a fall, or no change in its Unemployment Rate?

2) inflation or deflation?

3) economic growth? (YES or NO)

4) a rise, fall, or an indeterminate change in its level of exports?

5) a rise, fall, or an indeterminate change in its level of imports?

6) a rise, fall, or no change, in the Business Sector=s Unit Labor Costs?