The following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion.Suppose firms become pessimistic about future business conditions and cut back on investment spending.Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the business pessimism.?240ASPRICE LEVEL2001601208040F2ŐF3Ö+F4ADF50F6AD-DASF7F8(9F9CISF10O:F11F12FnLockInser PRICE LEV12080400AD020040060080010001200OUTPUT (Billions of dollars)the price levelIn the short run, the decrease in investment spending associated with business pessimism causes the price level topeople expected and the quantity of output tothe natural level of output. The business pessimism will cause the unemployment ratetothe natural rate of unemployment in the short run.Again, the following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion,before the decrease in investment spending associated with business pessimism.and theDuring the transition from the short run to the long run, price-level expectations willcurve will shift to theF7F6F4F2F5F3:0+8-DF8F9OF10OF11F122FnLock

Change in aggregate demand due to decrease in investment spending:-

The following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion. Suppose firms become pessimistic about future business conditions and cut back on investment spending. Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the business pessimism.

The following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion. Suppose firms become pessimistic about future business conditions and cut back on investment spending. Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the business pessimism.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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