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 the government increases spending on building and repairing highways, bridges, and ports. Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the increase in government spending. 240 AS 200 AD 160 AS 120 80 AD 40 200 400 600 800 1000 1200 OUTPUT (Billions of dollars) In the short run, the increase in government spending on infrastructure causes the price level to the price level people expected and the quantity of output to the natural level of output. The increase in government spending will cause the unemployment rate to 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 increase in government spending on infrastructure. PRICE LEVEL During the transition from the short run to the long run, price-level expectations will and the curve will shift to the Now show the long-run impact of the increase in government spending by shifting both the aggregate demand (AD) curve and the short-run aggregate supply (AS) curve to the appropriate positions. 240 AS 200 AD 160 AS 120 80 AD 40 200 400 600 800 1000 1200 OUTPUT (Billions of dollars) In the long run, as a result of the increase in government spending, the price level the quantity of output the natural rate of unemployment. the natural level of output, and the unemployment rate PRICE LEVEL

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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8. 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 the government increases spending on building and repairing highways, bridges, and ports.

Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the increase in government spending.

During the transition from the short run to the long run, price-level expectations will
and the
curve will shift to the
Now show the long-run impact of the increase in government spending by shifting both the aggregate demand (AD) curve and the short-run
aggregate supply (AS) curve to the appropriate positions.
240
AS
200
AD
160
AS
120
80
AD
40
200
400
600
800
1000
1200
OUTPUT (Billions of dollars)
In the long run, as a result of the increase in government spending, the price level
the quantity of output
the natural rate of unemployment.
the natural level of output, and the unemployment rate
PRICE LEVEL

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