8. Economic fluctuations I The following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural rate of output of $600 billion. Suppose a sudden and severe contraction in the housing market reduces the value of homes and causes consumers to spend less. Shift the short-run aggregate-supply (AS) curve or the short-run aggregate-demand (AD) curve to show the short-run impact of the housing market slump. PRICE LEVEL 240 200 100 120 00 40 40 200 400 600 AS AD AD 800 1000 1200 OUTPUT (Billions of dollars) In the short.nun the decrease in consumptio AS In the short run, the decrease in consumption spending associated with the housing market contraction causes the price level to fall below price level people expected and the quantity of output to fall below the natural rate of output. The housing market slump will cause the unemployment rate to fall below the natural rate of unemployment in the short run. the Again, the following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural rate of output of $600 billion, before the decrease in consumption spending associated with the housing market contraction. During the transition from the short run to the long run, price-level expectations will adjust upward aggregate-supply curve will shift to the right and the short-run Now show the long-run impact of the housing market slump by shifting both the short-run aggregate-demand (AD) curve and the short-run aggregate-supply (AS) curve to the appropriate positions. Now show the long-run impact of the housing market slump by shifting both the short-run aggregate-demand (AD) curve and the short-run aggregate-supply (AS) curve to the appropriate positions. PRICE LEVEL 240 200 AS1 100 AS2 120 0 0 200 400 800 AD1 AD2 800 1000 1200 OUTPUT (Bions of dollars) In the long run, as a result of the housing market slump, the price level i rate of output, and the unemployment rate | 2 | 2 decreases the quantity of output the natural the natural rate of unemployment