Economy in long-run equilibrium at the expected price level

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Reference no: EM13898610

The following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural rate 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 short-run aggregate demand (AD) curve to show the short-run impact of the business pessimism.

In the short run, the decrease in investment spending associated with business pessimism causes the price level to-------------- the price level people expected and the quantity of output to ---------------- the natural rate of output. The business pessimism 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 rate 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 will----------- and the short-run ------------ curve will shift to the ------------------------.

Now show the long-run impact of the business pessimism by shifting both the short-run aggregate demand (AD) curve and the short-run aggregate supply (AS) curve to the appropriate positions.

In the long run, as a result of the business pessimism, the price level --------------- , the quantity of output------------ the natural rate of output, and the unemployment rate---------------- the natural rate of unemployment.

Reference no: EM13898610

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