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 a sudden and severe contraction in the housing market reduces the value of homes and causes consumers to spend less.

Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the housing market slump.

In the short run, the decrease in consumption spending associated with the housing market contraction causes the price level to (rise above/ fall below)  the price level people expected and the quantity of output to (rise above/ fall below) the natural level of output. The housing market slump will cause the unemployment rate to (rise above/ fall below) 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 consumption spending associated with the housing market contraction.

During the transition from the short run to the long run, price-level expectations will (adjust upward / downward / 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 housing market slump 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 housing market slump, the price level (increase / decrease/ stay the same) , the quantity of output (rise above/ fall below/ return to ) the natural level of output, and the unemployment rate (rise above/ fall below/ return to )? the natural rate of unemployment.

Answer 1