Economic fluctuations I

The following graph shows the economy in long-run equilibrium at an expected price level of 120 and potential output of $300 billion. Suppose households suddenly begin to spend less and save more to increase saving for retirement.

Shift the shortrun aggregate suppiy (SEAS) curve or the aggregate demand (AD) curve to show the shortrun impact of the sharp increase in saving on the graph. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. 2-10 0 2m SRAS AD l:l mo 4 SRAS Lu 5 4120 ________+ L\" I Q E I I so I I I 40 I I I n a mo 2m am 400 500 one REAL GDP (Biliuns of dollars) In the short run, the decrease in consumption spending due to the increase in saving shifts the aggregate V curve to the V , causing the price level to V the price level people expected, and the quantity of output to V potential output. We sharp increase in saving will cause the unemployment rate to V the natural rate of unemployment in the short run. Again, the following graph shows the economy in longrun equilibrium at the expected price level of 120 and potential output of $300 billion before the decrease in consumption spending due to the increase in saving. Now, show the iongrun impact of the sharp increase in saving by shifting both the aggregate demand (AD) curve and the shortrun aggregate suppiy (ERAS) curve to the appropriate positions. (Note: Assume that the sharp increase in saving does not cause a change in the economy's resources, technoiogy, or pmduct'vity.) 2-10 0 2m SRAS AD l:l mo 4 SRAS Lu 5 A Izo ________+ L\" I Q E I I so I I I 40 I I I n 0 mo 2m am 400 500 one REAL GDP [Biliuns of dollars) During the transition from the short run to the long run, price level expectations will V , and the v curve will shift to the V . In the long runr as a result of the sharp increase in saving, the price level V , the quantity of output V potential output, and the unemployment rate V the natural rate of unemployment