The world is going through a mild recession, and as a result, they now buy less products from the US.

a) Use a graph and determine the short-run effects on the price level (P) and real output (Y) in the US economy. Your graph should be properly labeled.

We first assume that the policymakers in the US takes no deliberate action.

b) With time, what will happen to expected price level?

c) Based on (b), what will happen to the short-run aggregate supply curve?

We now assume, instead, that the policymakers in the US decides to intervene immediately instead of waiting for the economy to self-correct. They can stabilize output through monetary policy or fiscal policy.

d) How should the Fed adjust money supply and interest rate to stabilize output? Use a graph to illustrate how that works.

e) List two possible fiscal policies to stabilize output.