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 $600 billion. Suppose the government increases spending on building and repairing highways, bridges, and ports. Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the increase in government spending. 240 O AS 200 AD 180 AS 120 PRICE LEVEL 80 AD 40 0 200 400 800 800 1000 1200 OUTPUT (Billions of dollars)In the short run, the increase in government spending on infrastructure causes the price level to V the price level people expected and the quantity of output to V the natural level of output. The increase in government spending will cause the unemployment rate to V the natural rate of unemployment in the short run. Again. the following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of$600 billion, before the increase in government spending on infrastructure. During the transition from the short run to the long run, price-level expectations will V and the V curve will shift to the V . (? 240 O AS 200 AD 160 AS 120 PRICE LEVEL 80 AD 40 200 400 800 800 1000 1200 OUTPUT (Billions of dollars) In the long run, as a result of the increase in government spending, the price level , the quantity of output the natural level of output, and the unemployment rate the natural rate of unemployment.9 . Money Supply Suppose an economy is in long-run equilibrium. The central bank reduces the money supply by 5 percent. Use your diagram to show what happens to output and the price level as the economy moves from the initial to the new short-run equilibrium. LRAS O Aggregate Supply Aggregate Demand Aggregate Supply Price Level Aggregate Demand Quantity of OutputNow adjust the graph to show the new long-run equilibrium. What causes the economy to move from its short-run equilibrium to its long-run equilibrium? O The government increases spending to increase aggregate demand. O Nominal wages, prices, and perceptions adjust upward to this new price level. The government increases taxes to curb aggregate demand. O Nominal wages, prices, and perceptions adjust downward to this new price level. Which of the following is true according to the sticky-wage theory of aggregate supply as a result of the decrease in the money supply? Check all that apply. O Nominal wages at the initial equilibrium are equal to nominal wages at the new short-run equilibrium. Nominal wages at the initial equilibrium are greater than nominal wages at the new long-run equilibrium. Real wages at the initial equilibrium are greater than real wages at the new short-run equilibrium. O Real wages at the initial equilibrium are equal to real wages at the new long-run equilibrium. Judging by the impact of the money supply on nominal and real wages, this analysis consistent with the proposition that money has real effects in the short run but is neutral in the long run.10 . Great Depression In 1939, with the U.S. economy not yet fully recovered from the Great Depression, President Roosevelt proclaimed that Thanksgiving would fall a week earlier than usual so that the shopping period before Christmas would be longer. Graph A Graph B LRAS LRAS Aggregate Supply Aggregate Supply Price Level Price Level Aggregate Demand Aggregate Demand Quantity of Output Quantity of OutputWhich of the graphs represents the state of the economy before this pronouncement? 0 Graph A 0 Graph B True or False: President Roosevelt was trying to decrease aggregate demand. 0 True 0 False 12 . Inflation The economy begins in longrun equilibrium. Then one day, the president appoints a new chair ofthe Federal Reserve. This new chair is well known for her View that ination is not a major problem for an economy. Note: You will not be graded on any changes you make to the following graph, but you may use it to help you understand the scenan'o described. _0_ Aggregate Supply Aggregate Demand _|:|_ Aggregate Supply + Price Level LRAS Aggregate Demand Which of the following statements accurately describes what would happen as a result of this news? Check all that apply. O People would expect the price level to rise. O The nominal wage that workers and firms agree to in their new labor contracts would be lower than it would be otherwise. O The profitability of producing goods and services at any given price level would increase. O The short-run aggregate-supply curve would shift to the left. If aggregate demand is held constant, the shift in the aggregate-supply curve will cause the price level to V and the quantity of output produced to