I'm sorry, but I am an AI language model and cannot create or draw images/graphs. However, I can provide you with a description of each situation and explain the changes that would occur in the short run and long run equilibrium.
1. Situation: There is a decrease in consumer confidence and spending.
- Short Run Impact: Decreased consumer spending will lead to a decrease in aggregate demand (AD) curve. AD curve shifts to the left, intersecting the original long-run aggregate supply (LRAS) at a new short-run equilibrium point (B), which has lower output and higher unemployment compared to point A.
- Long Run Adjustment: The decrease in aggregate demand causes firms to reduce production, leading to lower demand for labor and potentially lower wages. Over time, the decrease in wages and lower resource prices will shift the aggregate supply (AS) curve to the right. The economy will adjust back to the original long-run equilibrium point (C), with lower output but returning to full employment level.
2. Situation: Government increases infrastructure spending.
- Short Run Impact: Increased government spending on infrastructure will raise aggregate demand (AD) curve. AD curve shifts to the right, intersecting the original long-run aggregate supply (LRAS) at a new short-run equilibrium point (B), which has higher output and lower unemployment compared to point A.
- Long Run Adjustment: The increase in aggregate demand creates a temporary increase in production and demand for labor. As resource prices adjust to increased demand, the aggregate supply (AS) curve will shift to the left. The economy will adjust back to the new long-run equilibrium point (C), with higher output and potentially higher wages.
3. Situation: There is an increase in oil prices.
- Short Run Impact: Increased oil prices will raise production costs and reduce aggregate supply (AS) curve. AS curve shifts to the left, intersecting the original aggregate demand (AD) curve at a new short-run equilibrium point (B), which has lower output and higher inflation compared to point A.
- Long Run Adjustment: The increased production costs lead to potential reductions in employment and wages. Over time, the decrease in wages and adjustments in resource prices will shift the aggregate supply (AS) curve back to the right. The economy will adjust to a new long-run equilibrium point (C) with lower output and higher prices compared to the initial equilibrium at point A.
Remember that in the long run, the economy will generally adjust to its potential output level at the intersection of aggregate demand (AD) and long-run aggregate supply (LRAS) curves, where there is full employment and stable prices.
For each of the following situations assume the economy is initially in long run equilibrium (label this point A in your graph) then draw the short run impact of the described change and label the new short run equilibrium as point B in your grap.Finally draw the new long run equilibrium situation after full adjustment to the described changes and label this long run equilibrium as point C in your graph.Your graph for each situation should contain the initial LRAS, AD and AS curves as well as the any new curves that occur in response to the described change. On the graph be sure to mark the actual path the economy follows as it moves along the AS and AD curves.
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