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.   ADAS02004006008001000120024020016012080400PRICE LEVELOUTPUT (Billions of dollars)AD1  AD2 AS      In the short run, the decrease in investment spending associated with business pessimism causes the price level torise above   the price level people expected and the quantity of output torise above   the natural level of output. The business pessimism will cause the unemployment rate tofall below   the 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. During the transition from the short run to the long run, price-level expectations willadjust downward   and theaggregate demand   curve will shift to theright   .   Now show the long-run impact of the business pessimism by shifting both the aggregate demand (AD) curve and the short-run aggregate supply (AS) curve to the appropriate positions.   ADAS02004006008001000120024020016012080400PRICE LEVELOUTPUT (Billions of dollars)AD1  AD2 AS1 AS2     In the long run, as a result of the business pessimism, the price levelincreases   , the quantity of outputreturns to   the natural level of output, and the unemployment ratereturns to   the natural rate of unemployment.

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question

Economic fluctuations I

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.
 
ADAS02004006008001000120024020016012080400PRICE LEVELOUTPUT (Billions of dollars)AD1  AD2 AS   
 
In the short run, the decrease in investment spending associated with business pessimism causes the price level torise above   the price level people expected and the quantity of output torise above   the natural level of output. The business pessimism will cause the unemployment rate tofall below   the 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.
During the transition from the short run to the long run, price-level expectations willadjust downward   and theaggregate demand   curve will shift to theright   .
 
Now show the long-run impact of the business pessimism by shifting both the aggregate demand (AD) curve and the short-run aggregate supply (AS) curve to the appropriate positions.
 
ADAS02004006008001000120024020016012080400PRICE LEVELOUTPUT (Billions of dollars)AD1  AD2 AS1 AS2  
 
In the long run, as a result of the business pessimism, the price levelincreases   , the quantity of outputreturns to   the natural level of output, and the unemployment ratereturns to   the natural rate of unemployment.

 

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps with 2 images

Blurred answer
Knowledge Booster
Supply Curve
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education