Use a graph to illustrate the long run adjustment to the scenario you depicted in (d). Explain what will happen over time.

Ans: Over time wages and prices will be bid up since the economy is operating at a production level greater than Yfe. As nominal wages increase, this will cause the SRAS curve to shift to the left from SRAS1 to SRAS2. Eventually the economy will return to Yfe but with a higher aggregate price level than the initial level. Unemployment will return to the full employment or natural rate of unemployment.