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The following graph shows a hypothetical economy in long-run equilibrium at an expected price level of 120 and a natural output level of $500 billion.

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The following graph shows a hypothetical economy in long-run equilibrium at an expected price level of 120 and a natural output level of $500 billion. Suppose the economies of several foreign countries experience rapidly growing incomes, causing foreign spending on domestic goods and services to increase. Using the graph, shift the sh oft-run aggregate suppr'y (AS) curve or the aggregate demand (AD) curve to Show the short-run impact of the economic prosperity abroad. @ 240 ' O 200 c AS AD El 160 4 AS |.I.| 2: LIJ | 120 - LIJ Q o: o. 30 - 29m 40 - o wlllllI'i 0 200 400 600 300 1000 1200 OUTPUT (Billions of dollars} In the short run, the increase in foreign spending on domestic goods associated with expansion abroad causes the price level to V the price level people expected and the quantity of output to v the natural level of output. The economic prosperity abroad will cause the unemployment rate to V the natural rate of unemployment in the short run. Again, the following graph shows a hypothetical economy experiencing long~run equilibrium at the expected price level of 120 and natural output level of $600 billion, prior to the increase in foreign spending on domestic goods associated with expansion abroad. Along the transition from the short run to the long run, price-level expectations will V and the 'V curve willshift to the V

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