1. (10 points) Consider an economy in equilibrium at point B in the figure below. Figure 1: LRAS SRASAP Aggregate Price P Total Output (a) (2 points) Explain why point B cannot be considered a long-run equilibrium.. (b) (3 points) If the government doesn't act, the economy will transit from point B to the long-run equilibrium of point C in the graph. Explain the logic behind this transition. Illustrate your answer with a graph. (Hint: focus on the role of the expected price level on the SRAS) Total Output (a) (2 points) Explain why point B cannot be considered a long-run equilibrium. (b) (3 points) If the government doesn't act, the economy will transit from point B to the long-run equilibrium of point C in the graph. Explain the logic behind this transition. Illustrate your answer with a graph. (Hint: focus on the role of the expected price level on the SRAS) (c) (3 points) Explain how can the economy transit from point B to the long-run equilibrium of point A if the government acts quickly by using fiscal policy, i.e. by using fiscal policy before firms adjust their expectations about the price level. What is the benefit from this stabilization policy? (d) (2 points) What limits the ability of the government to act quickly and push the economy to point A?