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.

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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.

 

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