3. The short-run and longrun supply response to a change in the price level The following graph represents the shortrun aggregate supplyr curve (SEAS) based on an expected price level of 180. The economy's potential output level is $9 trillion. Major unions across the country have recently negotiated threeyear wage contracts with employers. The wage contracts are based on an expected price level of 180, but the actual price level turns out to be 240. Show the shortrun effect of the unexpectedly high price level by dragging the curve or moving the point to the appropriate position. Tool tip: To move the curve, click and drag any part of the curve except the point. To move the pointr click and drag the point along the curve. If you want to move both, rst move the curve, and then move the point. The curve and point will snap into position, so if you try to move one of them and it snaps back to its original position, just try again and drag it a little farther. 380 SRAS[180] 300 SRAS[180] 240 180 PRICE LEVEL 120 60 3 6 12 15 1EB REAL GDP (Trillions of dollars)Interpret the change you drew on the previous graph by lling in the blanks in the following paragraph: The higherthanexpected price level causes rms to earn V prot than they expected on each unit of output they produce. and. therefore. they 7 their production level. At the same me. the real value of wages and other resource prices is V than workers and rms expected when they signed longtenn contracts. As a result, the economy as a whole produces at a level 7 its potential output. and the unemployment rate is V than its natural rate. Now. suppose prices remain higher than expected. A5 a result. in the next round of labor negotiations. unions demand and obtain higher wages for their members. The following graph shows the potential output for this economy as well as the same initial shortrun aggregate supply curve as in the rst graph. Shift one or both of these lines to illustrate how the economy adjusts to a new longrun equilibrium.