The following graph shows the economy in long-run equilibrium at the expected price level of 120 and
Question:
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. Suppose the economies of several foreign countries experience rapidly growing incomes, causing foreign spending on domestic goods and services to increase.
Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the economic prosperity abroad.
In the short run, the increase in foreign spending on domestic goods associated with expansion abroad causes the price level to Fall Below/ Rise Above the price level people expected and the quantity of output to Fall Below/ Rise Above the natural level of output. The economic prosperity abroad will cause the unemployment rate to Fall Below/ Rise Above 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 foreign spending on domestic goods associated with expansion abroad.
During the transition from the short run to the long run, price-level expectations will Adjust Downward/ Adjust Upward/ Remain The Same and the Aggregate Demand/ Short-Run Aggregate Supply curve will shift to the Left/ Right
Now show the long-run impact of the economic prosperity abroad by shifting both the aggregate demand (AD) curve and the short-run aggregate supply (AS) curve to the appropriate positions.
In the long run, as a result of the economic prosperity abroad, the price level Increase/ Decrease / Remain The Same , the quantity of output Rises Above/ Returns to/ Fall Below the natural level of output, and the unemployment rate Rises Above/ Returns to/ Fall Below the natural rate of unemploymen
Expert Answer:
