This is not a mathematical question, but rather we want to see you use the figures in the model from class to show how the different curves will move around, and give explanations. Suppose that we begin in an economy that is both (i) in macroeconomic equilibrium, and (ii) at potential output (Y^∗) - in other words there are no (current) output gaps.
Suppose that the costs of production for firms rise significantly over this period. What would we expect to happen to Y and p in the short-run? What type of output gap is created? Include a figure with AD,AS, and Y∗ in your explanation.