8. 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 firms become pessimistic about future business conditions and cut back on investment spending. Shift the short-run aggregate-supply (AS) curve or the short-run aggregate-demand (AD) curve to show the short-run impact of the business pessimism. ? 240 AS 200 AD 160 AS PRICE LEVEL 80 AD 40 O 200 400 600 800 1000 1200 OUTPUT (Billions of dollars) In the short run, the decrease in investment spending associated with business pessimism causes the price level to the price level people expected and the quantity of output to the natural level of output. The business pessimism will cause the unemployment rate to the natural level 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 decrease in investment spending associated with business pessimism. During the transition from the short run to the long run, price-level expectations will and the short-run curve will shift to the Now show the long-run impact of the business pessimism by shifting both the short-run aggregate-demand (AD) curve and the short-run aggregate- supply (AS) curve to the appropriate positions. ? 240 AS 200 AD 180 AS PRICE LEVEL 120 80 AD 40 0 200 400 800 800 1000 1200 OUTPUT (Billions of dollars) In the long run, as a result of the business pessimism, the price level , the quantity of output the natural level of output, and the unemployment rate the natural level of unemployment