a. Sketch a diagram of an economy in long-run equilibrium using the AD/AS model.
b. Assume that there is a large increase in government spending. What will be the short run impact? Add this to your diagram in a.
c. Assuming no further policy changes, explain the long run impact using the theory of sticky prices. Add this to your diagram in a. & b.
d. Redraw your diagram from a. & b. With what type of monetary policy might you expect the RBNZ to respond to with? Add this to your new diagram.