*3 The economy shown in the graph is initially on aggregate demand curve AD0 and short-run aggregate supply curve SAS. Then aggregate demand decreases and the aggregate demand curve shifts leftward to AD1.

a What is the equilibrium real GDP and price level? b If the decrease in aggregate demand is temporary and the government follows a fixed-rule fiscal policy, what happens to real GDP and the price level? Trace the immediate effects and the adjustment as aggregate demand returns to its original level. c If the decrease in aggregate demand is temporary and the government follows a feedback-rule fiscal policy, what happens to real GDP and the price level? Trace the immediate effects and the adjustment as aggregate demand returns to its original level. d If the decrease in aggregate demand is permanent and the government follows a fixed-rule fiscal policy, what happens to real GDP and the price level?

e If the decrease in aggregate demand is permanent and the government follows a feedback-rule fiscal policy, what happens to real GDP and the price level?

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Price level (GDP deflator, 2000-100) 160 150 140 130 120 110 100 88 90 80 LAS SAS ADO AD 650 700 750 800 850 900 Real GDP (billions of 2000 euros)