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5. Economic fluctuations I The following graph shows a hypothetical economy in long-run equilibrium at an expected price level of 120 and a natural output
5. Economic fluctuations I The following graph shows a hypothetical economy in long-run equilibrium at an expected price level of 120 and a natural output level of $600 billion. Suppose a sudden and severe contraction in the housing market reduces the value of homes and causes consumers to spend less. Using the graph, shift the short-run aggregate suppiy (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the housing market slump. 240 O AS 200 AD O 160 AS 120 PRICE LEVEL 80 AD 40 0 0 200 400 600 800 1000 1200 OUTPUT (Billions of dollars)In the short run, the decrease in consumption spending associated with the housing market contraction causes the price level to V the price level people expected and the quantity of output to V the natural level of output. The housing market slump will cause the unemployment rate to V the natural rate of unemployment in the short run. Again, the Following graph shows a hypothetical economy experiencing long-run equilibrium at the expected price level of 120 and natural output level of $600 billion, prior to the decrease in consumption spending associated with the housing market contraction. Along the transition from the short run to the long run, price-level expectations will 7 and the V curvewiiishifttothe V . Using the graph, illustrate the long-run impact of the housing market slump by shifting both the aggregate demand (AD) curve and the short-run aggregate supply (AS) curve in the appropriate directions. \fIn the long run, due to the housing market slump, the price level V , the quantity of output V the natural level of output, and the unemployment rate V the natural rate
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