The following graph shows the economy in tong-run equilibrium at the expected price level of 120 and the natural level of output of $300 billion Suppose households suddenly begin to spend less and save more in order to increase saving for retirement Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the sharp Increase in saving. 240 200 AS AD 160 AS PRICE LEVEL 120 80 AD 40 0 O too 200 500 600 300 400 OUTPUT (Bilions of dollars) In the short run, the decrease in consumption spending associated with the increase in saving causes the price level to the price level people expected and the quantity of output to the natural level of output. The sharp increase in saving will cause the unemployment rate to 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 $300 billion before the decrease in consumption spending associated with the increase in saving During the transition from the short run to the long run, price-level expectations will curve will shift to the and the Now show the long-run impact of the sharp increase in saving by shifting both the aggregate demand (AD) curve and the short-run aggregate supply (AS) curve to the appropriate positions. 240 O 200 AS $ AD 0 100 AS 120 PRICE LEVEL 00 AD 40 100 500 000 200 300 400 OUTPUT (Billions of dollars) the In the long run, as a result of the sharp increase in saving, the price level the quantity of output natural level of output, and the unemployment rate the natural rate of unemployment