# The following graph represents the short-run aggregate supply curve (SRAS SRAS) based on an expected price level of 150. The economy’s natural real…

The following graph represents the short-run aggregate supply curve (SRAS

SRAS) based on an expected price level of 150. The economy’s natural real GDP level is \$9 trillion.

Major unions across the country have recently negotiated three-year wage contracts with employers. The wage contracts are based on an expected price level of 150, but the actual price level turns out to be 100. Show the short-run effect of the unexpectedly low price level by dragging the curve or moving the point to the appropriate position.

Tool tip: To move the curve, click and drag any part of the curve except the point. To move the point, click and drag the point along the curve. If you want to move both, first move the curve, and then move the point. The curve and point will snap into position, so if you try to move one of them and it snaps back to its original position, just try again and drag it a little farther.

SRAS[150]

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PRICE LEVEL

REAL GDP (Trillions of dollars)

SRAS[150]

Interpret the change you drew on the previous graph by filling in the blanks in the following paragraph:

The lower-than-expected price level causes firms to earn profit than they expected on each unit of output they produce, and, therefore, they their production level. At the same time, the real value of wages and other resource prices is than workers and firms expected when they signed long-term contracts. As a result, the economy as a whole produces at a level its natural real GDP, and the unemployment rate is than its natural rate.

Now, suppose prices remain lower than expected. As a result, in the next round of labor negotiations, unions accept lower wages for their members. The following graph shows the natural real GDP for this economy as well as the same initial short-run aggregate supply curve as in the first graph. Shift one or both of these lines to illustrate how the economy adjusts to a new long-run equilibrium.

Nat. Real GDP

SRAS

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REAL GDP (Trillions of dollars)

Nat. Real GDP

SRAS