Reference no: EM131426680

Will Tip extra for critical thought answer with graphs but nothing excessive is necessary.

Assume the economy initially is in a long run equilibrium. Suppose the following shocks occur: U.S. fiscal policymakers decide to decrease government spending dramatically on all federal programs; western European nations adopt protectionist policies toward the U.S.; Canada lowers trade barriers against all nations except the U.S.; the Fed's standing policy is to prevent inflation from increasing beyond its current rate. Using the AD/AS model, briefly explain the short-run and long-run effects on inflation and real GDP that these policies will have. Also, comment on the value of the U.S. dollar against the Euro and Canadian dollar.