1. Use the figure below to answer the following questions.

Assume that the economy initially is operating at price level 120 and real output level $870. This output level is the economy’s potential (or full-employment) level of output. Next, suppose that the price level rises from 120 to 130. By how much will real output increase in the short run? In the long run?

Instead, now assume that the price level dropped from 120 to 110. Assuming flexible product and resource prices, by how much will real output fall in the short run? In the long run?

What is the long-run level of output at each of the three price levels shown? LO38.1