Question

9. Economic fluctuations II 

The following graph shows the short-run aggregate supply curve (AS), the aggregate demand curve (AD), and the long-run aggregate supply curve (LRAS) for a hypothetical economy. Initially, the expected price level is equal to the actual price level, and the economy is in long-run equilibrium at its natural level of output, $120 billion. 

Suppose a bout of severe weather drives up agricultural costs, increases the costs of transporting goods and services, and increases the costs of producing goods and services in this economy. 

Use the graph to help you answer the questions about the short-run and long-run effects of the increase in production costs that follow. (Note: You will not be graded on any adjustments made to the graph.) 

Hint: For simplicity, ignore any possible impact of the severe weather on the natural level of output.

The short-run economic outcome resulting from the increase in production cost is known as _______ 

Now suppose that the government decides not to take any action in response to the short-run economic Impact of the severe weather. 

In the long run, when the government does nothing, the output in the economy will be_______  billion and the price level will be_______ .

Answer 1