Use the figure to answer the following questions. Assume that the economy initially is operating at price level 120 and real output level $870. This output level is the economy’s potential (full-employment) level of output. Next, suppose that the price level rises from 120 to 130. **Price Level and Real Output Graph**This graph illustrates the relationship between price levels and real output in dollars. The x-axis represents Real Output, ranging from $810 to $950, while the y-axis indicates the Price Level, ranging from 90 to 160.**Key Elements:**1. **Aggregate Supply Curves:** - Three positively sloped lines labeled $AS_1$, $AS_2$, and $AS_3$. - Each line represents a different level of aggregate supply in the economy. 2. **Points of Intersection:** - Each line intersects dashed lines both horizontally and vertically, indicating specific combinations of price levels and real output.3. **Shifting of Curves:** - The curves shift to the right, from $AS_1$ to $AS_3$, indicating an increase in aggregate supply.**Analysis:**- The graph demonstrates that as aggregate supply increases (from $AS_1$ to $AS_3$), the economy's capacity to produce output also increases, potentially at different price levels.- Each curve reflects potential economic conditions or policies affecting supply, such as technological advancements, resource availability, or policy changes focused on improving productivity.This type of graph is essential for understanding macroeconomic concepts and how shifts in aggregate supply can impact overall economic performance. **Instructions:** Enter your answers as a whole number.a. By how much will real output increase in the short run?$ ________In the long run?$ ________b. Instead, now assume that the price level drops from 120 to 110. Assuming flexible product and resource prices, by how much will real output fall in the short run?$ ________In the long run?$ ________c. What is the long-run level of output at each of the three price levels shown?$ ________

The short-run aggregate supply refers to the total supply of all goods and services produced in an economy in a given fiscal year. It represents the total supply at different price levels.It is given that the price level increased from 120 to 130. From the given graph it is observed that the real output at the price level of 130 is $890.Hence, the real output increases by $890-$870=$20 in the short run.In the long, the government or the central bank will implement contractionary fiscal or monetary policies to bring economy back to the potential level of real output, i.e., $870. Hence, the change in the long run will be $0.It is given that the price level increased from 120 to 110. From the given graph it is observed that the real output at the price level of 110 is $850.Hence, the real output increases by $850-$870=-$20 in the short run.In the long run, the government or the central bank will implement expansionary fiscal or monetary policies to bring economy back to the potential level of real output, i.e., $870. Hence, the change in the long run will be $0.In the long run, the government or the central banks implement expansionary fiscal or monetary policies to bring economy back to the potential level of real output. Hence, the real output in the long run at the given price levels will be the given potential output, i.e., $870.a. The real output increase in the short run will be $20.In the long run the real output will increase by $0.b. The real output decrease in the short run will be -$20.In the long run the real output will decrease by $0.c. The long-run level of output at each of the given three price levels is $870.