Suppose an economy that is initially at full employment faces a substantial increase in the factor cost of production.
a. Discuss (with the aid of aggregate output market and money market diagrams) the short-run effect on output, unemployment, general price level and interest rate with a substantial increase in the factor cost of production.
b. Discuss (with the aid of an aggregate output market diagram) what kind of monetary policy can be adopted to restore the economy back to full employment equilibrium.
c. Suppose the problem you discussed in part (a) relies on the self adjustment mechanism instead of the discretionary policy proposed in part (b). Examine the possible impact of minimum wage on the self-adjustment mechanism.