1.Suppose that a massive earthquake strikes Japan and has two major economic impacts on that country. The earthquake causes a large, permanent drop in Japanese income. Second, the earthquake causes a large drop in Japanese exports of parts to the US which forces US firms to cut back production temporarily. Assume the earthquake is unanticipated.

Using the AD-AS framework below, show and EXPLAIN what would happen in the short-run and the long-run to the US real GDP and the aggregate price level, other things constant. In addition, should government engage in fiscal policy to help the economy during this period? If so, explain which policy and why. Make sure to explain which curves shift and why. Label curves clearly. Identify the new equilibrium in the short-run and the long-run.