3. Suppose that people suddenly become pessimistic about the future. Use the model of aggregate demand and aggregate supply to analyze the effects of this change. (You don't need to draw the graph)

(a) (4 pts) Which curve will be affected and to which direction? How do the price level and output change in the short-run?

(b) (4 pts) If we let the economy to adjust by itself, how does the economy restore the long-run? (Which curve will shift and what happens to price level and output?)

(c) (3 pts) If the central bank does not want to wait for self-adjustment, what policy can thecentral bank use? Which curve will be affected and to which direction?