(b) Explain, with the aid of three separate IS-LM-FE diagrams, how this will affect real output, real interest rate and the general price level in three steps: (i) before the general price level adjusts; (ii) when the general price level is adjusting; (iii) after the price adjustment process is completed. Is the general price level increasing or decreasing during the price adjustment process? Explain the intuition of your answer with reference to the AD-AS framework.

(b) Explain, with the aid of three separate IS-LM-FE diagrams, how this will affect real output, real interest rate and the general price level in three steps: (i) before the general price level adjusts; (ii) when the general price level is adjusting; (iii) after the price adjustment process is completed. Is the general price level increasing or decreasing during the price adjustment process? Explain the intuition of your answer with reference to the AD-AS framework.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter21: Unemployment

Section: Chapter Questions

Problem 35CTQ: While unemployment is highly negatively correlated with the level of economic activity, in the real...

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