8. Economic fluctuations 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 governmen spending 240 200 AS AD $ 22 100 AS PRICE LEVEL 120 00 AD 40 o 0 200 1000 1200 400 000 600 OUTPUT (Billions of dollars) 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 bols 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 curve will shift to the and the Now show the long-run impact of the increase in government spending by switing both the aggregate demand (AD) curve and the short run aggregate supply (AS) curve to the appropriate positions. 240 O 200 AS AD AS PRICE LEVEL 120 30 AD 10 200 400 600 200 2 Tips 240 Tips 200 AS AD 150 AS PROCE LEVEL 120 00 AD 40 O 5000 1200 400 000 800 OUTPUT (Billions 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