Use the accompanying figure to answer the follow questions.

1. Assume that the economy initially is operating at price level 120 and real output level $900. This output level is the economy's potential (or full-employment) level of output. Suppose that the price level rises from 120 to 140 due to increase in AD. By how much will real output increase in theshort run? In thelong-run? (4 points)
2. Instead, assume that the economy initially is operating at price level 160 and real output level $900. Also assume that this output level is the economy's potential (or full-employment) level of output. Now assume that the price level dropped from 160 to 140 due to decline in AD. Assuming flexible product and resource prices, by how much will real output fall in theshort run? In thelong run? (4 points)
3. What is the long-run level of output at each of the three price levels shown? (2 points)

AS. AS. C 160 140 Price Level 120 AD. AD 870 900 930 Real Gross Domestic Product