Use AD-AS model to analyze how the following shocks will affect economic activity in the short and long run; for each shock:

a) Illustrate changes that will occur using AD-AS graph, in short-run and explain why each curve shifts.

b) Determine how the prices and the output will be affected in the short-run.

c) On the same diagram, illustrate how the economy can adjust in the long-run (moving to the potential level of output) by a shift in the SRAS curve.

d) Determine how the prices and output will be affected in the long-run.

The shocks are:

1. Consumers become optimistic about their future earnings and start consuming more.

2. A country the U.S. trades with (consider a major export of goods and services to that country) experiences a recession.