7 . Economic fluctuations I

The following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $300 billion. Suppose households suddenly begin to spend less and save more in order to increase saving for retirement.

Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show theshort-runimpact of the sharp increase in saving.

Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the sharp increase in saving. 240 O AS AD 200 160 AS 120 PRICE LEVEL 80 AD 40 0 100 200 300 400 500 600 OUTPUT (Billions of dollars)