Suppose the economy had been operating at its potential level of real GDP in the past, butnet exports and investment spendinghave suddenly and substantially declined.The decline is expected to last for a significant period of time.

a)(0.5 point) Explain the effect of this event on the business cycle with the help of the AD-AS model.Which curve in the AD-AS model shifts in which direction,why?

b)(2 points)What short-run impact would the event have on the economy's [i] price level, [ii] level of real GDP, [iii] unemployment rate, and [iv] government budget deficit [i.e. increase, decrease, no effect,why]?

c) (1 points) Describe how the economy "self-corrects" itself in the long run.In order to get full credit, explain the mechanismbehindthe "self-correction",

d)(0.5 points)If you were to illustrate the effect of self-correction on the diagram, which curve will be affected and in which direction?

e) (2 points) As a result of self-correcting mechanism explained by you what is the effect on i) Real GDP, ii) price level and iii) unemployment in the long run.