Price Level Aggregate Demand Short-Run AS Long-Run AS 100 700 200 450 120 600 325 450 140 500 500 450 160 400 570 450 180 300 620 450 a) Plot the AD/AS diagram. Identify the Short-Run equilibrium. b) Imagine that consumers begin to lose confidence about the state of the economy, and so AD becomes lower by 275 at every price level. Identify the new aggregate equilibrium. c) Is there a recession? Calculate the output gap. d) Suppose the government decides to use fiscal policy to get us back to potential output. Should they use expansionary or contractionary fiscal policy? e) If the marginal propensity to consume is 0.7, then by how much should government spending change in order to get us back to potential output