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8. Economic fluctuations I 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 several foreign economies experience severe recessions, causing foreign purchases of domestic goods and services to decline sharply. Shift the short-run aggregate supply (A5) curve or the aggregate demand (AD) curve to show the short-run impact of the economic turmoil abroad. PRICE LEVEL In the short run, the decrease in foreign spending on domestic goods associated with recession abroad causes the price level to V the price level people expected and the quantity of output to v the natural level of output. The economic turmoil abroad will cause the unemployment rate to V 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 decrease in foreign spending on domestic goods associated with recession abroad. During the transition from the short run to the long run, price-level expectations will 7 and the 7 curve will shift to the v . Now show the long-run impact of the economic turmoil abroad by shifting both the aggregate demand (AD) curve and the short-run aggregate supply (AS) curve to the appropriate Positions. 0) 240 + 200 AS AD U 1 60 _| AS \">4 LIJ -' 1 20 m 200 '- 160 120 PRICE LEVEL 80 40 o 200 400 300 300 OUTPUT (Billions of dollars) 1000 1200 AD AS In the long run, as a result of the economic turmoil abroad, the price level natural level of output, and the unemployment rate v , the quantity of output V the natural rate of unemployment. v the