9. Economic fluctuations II "ools The following graph shows the short-run aggregate supply curve (AS), the aggregate demand curve (AD), and the long-run aggregate supply curve LRAS) for a hypothetical economy. Initially, the expected price level is equal to the actual price level, and the economy is in long-run equilibrium at its natural level of output, $90 billion Suppose war in the world's main oil-producing region sharply reduces the world oil supply, causing oil prices to rise and increasing the costs of producing goods and services in this economy, Use the graph to help you answer the questions about the short-run and long-run effects of the increase in production costs that follow. (Note: You will not be graded on any adjustments made to the graph.) Hint For simplicity, ignore any possible impact of the higher oil prices on the natural level of output 110 LRAS 105 AS AD 100 -O 3 AS PRICE LEVEL 00 LRAS 10 AD 15 110 LRAS 105 AS o --- AD 100 os 5 AS PRICE LEVEL 0 --- 85 LRAS 80 AD 75 70 70 75 105 110 80 25 00 95 100 OUTPUT (Billions of dollars) The short-run economic outcome resulting from the Increase in production costs is known as Now suppose that the government decides not to take any action in response to the short-run economic impact of the higher oil prices. In the long run, when the government does nothing, the output in the economy will be's billion and the price level will be