The following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natuml level of output of $600 billion. Suppose the government increases spending on building and repairing highways, bridges, and ports. Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the increase in government spending. 240 O 200 AD _n_ 160 _I As \">' DJ ' 120 DJ 9 n: D. 80 40 o o 200 400 600 300 1000 1200 OUTPUT (Billions of dollars) In the short run, the increase in government spending on infrastructure causes the price level to v the price level people expected and the quantity of output to V the natural level of output. The increase in government spending will cause the unemployment rate to V 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 increase in government spending on infrastructure. During the transition from the short run to the long run, price-level expectations will V and the V curve will shift to the V . Now show the long-run impact of the increase in government spending by shifting both the aggregate demand (AD) curve and the shortrun aggregate supply (AS) curve to the appropriate positions. 240 O 200 AD El 160 _. AS \">J uJ ' 120 DJ 9 n: n. 30 40 0 . I . . . 0 200 400 600 300 1000 1200 OUTPUT (Billions of dollars) In the long run, as a result of the increase in government spending, the price level V , the quantity of output V the natural level of output, and the unemployment rate V the natural rate of unemployment