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The following graphs show the state of an economy that is currently in long-run equilibrium. The first graph shows the aggregate demand (AD) and long-run aggregate supply (LRAS) curves. The second shows the long-run and short-run Phillips curves (LRPC and SRPC). LRAS LRAS 12 OUTPUT (Trillions of dollars) LRPC SRPC LRPC SRPC 15 18 12 UNEMPLOYMENT (Percent)

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Natural rate of unemployment is 9% which is determined by the long run phillips curve. When there is an increase in the money supply, AD shifts to the right, increasing the price and inflation and reducing the unemployment rate. In the long run, the phillips curve in the short run shifts up and economy is restored at its natural level,

Long run effect of this policy is to increase the inflation rate, no change in the unemployment rate and so no change in the real GDP.

LRAS AD LRAS AD 0 24 681012 OUTPUT (Trillions of dollars) LR SRPC SRPC 9 12 15 18 UNEMPLOYMENT (Percent)

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