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 the government increases spending on building and repairing highways, bridges, and ports Shit 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 220 0 200 AS AD 360 22 AS PRICE LEVEL 120 AD 0 0 300 400 600 000 OUTPUT(ons of dollars) 1000 1200 In the short run, the increase in government spending on infrastructure causes the price level to the price level people expected and the quantity of output to the natural level of output. The increase in government spending will cause the unemployment rate to 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 5600 billion, before the increase in government spending on infrastructure, During the transition from the short run to the long run, price-level expectations will and the curve will shift to the Now show the long-run impact of the increase in government spending by shifting both the aggregate demand (AD) curve and the short-run aggregate supply (AS) curve to the appropriate positions Q 240 200 AS AD 100 AS PRICE LEVEL 120 30 AD an Homework (Ch 20) Now show the long-run impact of the increase in government spending by shifting both the aggregate demand (AD) curve and the short-run aggregate supply (AS) curve to the appropriate positions. 240 3 200 AS -- -o- AD 160 AS 120 PRICE LEVEL 10 AD 40 200 1000 1200 400 000 300 OUTPUT (Bitons of dollars) In the long run, as a result of the increase in government spending, the price level the natural level of output, and the unemployment rate the quantity of output the natural rate of unemployment