Imagine that an economy begins in equilibrium at the natural rate of output. It is shocked by a decrease in Investment spending.

a) Use an Aggregate Demand - Aggregate Supply diagram to show the impact of this shock. Label the short-run position and the long-run position of the economy.

b) Explain how the economy moves from the short-run to the long-run position.

c) Discuss the policy options available to a government and central bank to return the economy to its original position. Describe any consequences on the economy.