(Solved): 7. In a fully labeled graph, illustrate the following scenario: If Italy leaves the Euro zone there ...

7. In a fully labeled graph, illustrate the following scenario: If Italy leaves the Euro zone there will be macroeconomic consequences. The possible collapse of the Euro zone acts as a shock to sellers around the world worried about international economic stability. Show the short run impact of such an event in an aggregate demand and supply model for the United States. What happens to price levels, output and employment in the short run? How could we return to long run equilibrium? You should identify a specific policy that will shift the economy back to the long run equilibrium. Which curve in your model is affected by your policy? What are the consequences of your policy in terms of output, employment and inflation? Price levels (up, down, same) Output (up, down, same) Employment (up, down, same) POLICY: Curve affected: Price levels (up, down, same) Output (up, down, same) Employment (up, down, same)