In the short run, the decrease in consumption spending associated with the housing market contraction causes the price level to rise above/fall below the price level people expected and the quantity of output to rise above/fall below the natural level of output. The housing market slump will cause the unemployment rate to rise above/fall below 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 $600 billion, before the decrease in consumption spending associated with the housing market contraction.

During the transition from the short run to the long run, price-level expectations will adjust upward, adjust downward, remain the same and the aggregate demand/short-run aggregate demand curve will shift to the Left/Right

In the long run, as a result of the housing market slump, the price level increases/decreases/remains the same, the quantity of output rises above/returns to/falls belowthe natural level of output, and the unemployment rate rise above/returns to/falls below the natural rate of unemployment.

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 a sudden and severe contraction in the housing market redch the value of homes and causes consumers to spend less. Shift the shorterun aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the housing market slump. 240 290 160 120 PRICE IJEVEL 8|] 0 200 400 600 30" 100\" 1200 OUTPUT (Billions of dollars) ' In the short runr the decrease in consumption spending associated with the housing market contraction causes the once level to price level people expected and the quantity of output to unemployment rate to v the v the natural level of output. The housing market slump will cause the V the natural rate of unemployment in the short run. In the short run, the decrease in consumption spending associated with the housing market contraction causes the price level to v the price level people expected and the quantity of output to Y the natural level of output. The housing market slump will cause the unemployment rate to V the natuml 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 $600 billion, before the decrease in consumption spending associated with the housing market contraction. Dunng the transition from the short run to the long run, price-level expectations will V and the v curve will shift to the V . New show the long-run impact of the housing market siump by shifting both the aggregate demand (ADJ curve and the shortrun aggregate supply (AS) curve to the appropriate positions. 24D 2|") 160 120 FRJCE |VEL 80 40 Now show the long-run impact of the housing market slump by shifting both the aggregate demand (AD) curve and the short-run aggregate supply (AS) curve to the appropriate positions. 240 O 200 AS AD 160 AS 120 PRICE LEVEL 80 AD 40 200 400 600 800 1000 1200 OUTPUT (Billions of dollars) In the long run, as a result of the housing market slump, the price level , the quantity of output the natural level of output, and the unemployment rate the natural rate of unemployment