The federal government wants to cool down the overheated economy by cutting its spending. Describe how this policy may affect the unemployment rate.
Next, consider the follwoing three scenarios, and USE APPROPRIATE DIAGRAMS to show the likely effects of an activist policy in both the short and long run.
A. The economy is above potential output.
B. The economy is at potential output.
C. The economy is below potential output.
*Please answer the questions with their corresponding letters (A,B, and C) for easier understanding.
Total output in the short run is determined.