P + LRAS1 AD3 SRAS3 SRAS2 AD2 [AD1 Y Y2 Y3 Figure 1: Aggregate Demand and Supply 5. For this question, refer to figure 1. What is the level of potential output in this economy? 5 points. 6. For this question, refer to figure 1. Suppose Aggregate Demand is given by AD2, and Short Run Aggregate Supply is given by SRAS2. Then, suppose that the Federal Government decides to significantly reduce its military spending. What will the price level and output be, in the short run? 5 points. 7. After the fall in government spending on the military in the previous questions, will nominal wages be higher, or lower, in the long run? Will real wages be higher or lower, in the long run? 5 points