Interpret the change you drew on the previous graph by filling in the blanks in the following paragraph: The higher-than-expected price level causes firms to earn more profit than they expected on each unit of output they produce, and, therefore, they increase their production level. At the same time, the real value of wages and other resource prices is lower than workers and firms expected when they signed long-term contracts. As a result, the economy as a whole produces at a level above its full- employment output, and the unemployment rate is lower than its natural rate. Now, suppose prices remain higher than expected. As a result, in the next round of labor negotiations, unions demand and obtain higher wages for their members. The following graph shows the long-run aggregate supply curve (LRAS) at full-employment output for this economy as well as the same initial short-run aggregate supply curve as in the first graph. Shift one or both of these lines to illustrate how the economy adjusts to a new long-run equilibrium. PRICE LEVEL (CPI) 240 200 160 120 80 40 0 LRAS LRÄS SRAS LRAS SRAS (?) * correct?

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