1. 3. Equilibrium P
SAS
LAS P* AD Y Y* Yf

2. 4.a. Aggregate demand P SAS LAS AD0 -> AD1 => P Y
=> unemployment decreases but inflation increases
AD1
AD0
AD2 P1
AD0 -> AD2 => P Y
=> unemployment increases but inflation decreases P0 P2 Y Y2 Y0 Y1 Yf

3. 4.a.(2)(a) Monetary policy
SAS
LAS
AD0 -> AD1 => P Y
=> unemployment decreases but inflation increases
AD1
AD0
Use contractionary monetary policy to deal with the problem of inflation
AD2 P1
AD0 -> AD2 => P Y
=> unemployment increases but inflation decreases P0 P2
Use expansionary monetary policy to deal with the problem of unemployment Y Y2 Y0 Y1 Yf

4. Effectiveness of monetary policy
IRE
IRE
IRE0
IRE1
IRE
IRE0
IRE1
IRE

5. 4.a.(2)(b) Fiscal policy P SAS LAS AD0 -> AD1 => P Y
=> unemployment decreases but inflation increases
AD1
AD0
Use contractionary fiscal policy to deal with the problem of inflation
AD2 P1
AD0 -> AD2 => P Y
=> unemployment increases but inflation decreases P0 P2
Use expansionary fiscal policy to deal with the problem of unemployment Y Y2 Y0 Y1 Yf

6. 4.a.(2)(b) i) Crowding out r MS0 MS1 r MD1 IRE MD0 M IRE r1 r1 r0 r0

7. b. Short-run aggregate supply
SAS1 P
SAS0
LAS
Resource costs increase:
SAS0 -> SAS1 => P Y
=> unemployment increases and inflation increases
Worst possible situation: P1
- Using expansionary policy to deal with unemployment makes inflation worse P0 AD
- Using contractionary policy to deal with inflation makes unemployment worse Y Y1 Y0 Yf

8. c. Long-run aggregate supply
SAS
LAS0
SAS
LAS1
More resources, more efficient use of resources, improved technology => economic growth
SAS0 -> SAS1 => P Y P0
=> unemployment decreases and inflation decreases P1 AD Y Y0
(Yf)0 Y1
(Yf)1

9. 5. Business cycle Y Time Peak Recession Expansion Turning points
Trough
Time