Suppose that the economy is initially at the natural level of real GDP that corresponds to Y1 in Fig

Suppose that the economy is initially at the natural level of real GDP that corresponds to Y1 in Fig

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Suppose that the economy is initially at the natural level of real GDP that corresponds to  Y 1  in Figure  2  . Associated with this level of real GDP is an aggregate expenditure curve,  AE 1 . Now, suppose that  autonomous expenditure declines, from  A 1  to  A 3 , causing the  AE  curve to shift downward from  AE 1  to  AE 3 . This decline in autonomous expenditure is also represented by a reduction in aggregate  demand from  AD 1  to  AD 2 . At the same price level,  P 1 , equilibrium real GDP has fallen from  Y 1  to  Y 3 However, the intersection of the  SAS  and  AD 2  curves is at the lower price level,  P 2 , implying that the  price level falls. The fall in the price level means that the aggregate expenditure curve will not fall all  the way to  AE 3  but will instead fall only to  AE 2 . Therefore, the new level of equilibrium real GDP is at  Y 2 , which lies below the natural level, 
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