For example, an increase in the money supply, a variable, will cause the price level, a variable, to increase but will have no long-run effect on the quantity of goods and services the economy can produce, a variable. the distinction between real variables and nominal variables is known as in the short run, however, most economists believe that real and nominal variables are intertwined. economists use the model of aggregate demand and aggregate supply to examine the economy's short-run fluctuations around the long-run output level. the following graph shows an incomplete short-run aggregate demand (ad) and aggregate supply (as) diagram-it needs appropriate labels for the axes and curves. you will identify some of the missing labels in the questions that follow. vertical axis horizontal axis the vertical axis of the aggregate demand and aggregate supply model measures the overall the aggregate curve shows the quantity of goods and services that firms produce and sell at each price level. in the short run, the quantity of output that firms supply can deviate from the natural level of output if the actual price level in the economy deviates from the expected price level. several theories explain how this might happen. for example, the misperceptions theory asserts that changes in the price level can temporarily mislead firms about what is happening to their output prices. consider a soybean farmer who expects a price level of 100 in the coming year. if the actual price level turns out to be 90, soybean prices will , and if the farmer mistakenly assumes that the price of soybeans declined relative to other prices of goods and services, she will respond by the quantity of soybeans supplied. if other producers in this economy mistake changes in the price level for changes in their relative prices, the unexpected decrease in the price level causes the quantity of output supplied to the natural level of output in the short run. suppose the economy's short-run aggregate supply (as) curve is given by the following equation: quantity of output supplied = natural level of output + ax (price level actual – price levelexpected) the greek letter a represents a number that determines how much output responds to unexpected changes in the price level. in this case, assume that a = $2 billion. that is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural level of output by $2 billion. suppose the natural level of output is $50 billion of real gdp and that people expect a price level of 100. on the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (lras) curve. then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (as) curve at each of the following price levels: 90, 95, 100, 105, and 110. d lras price level + 0 10 20 80 90 100 30 40 50 60 70 output (billions of dollars) the price the short-run quantity of output supplied by firms will fall below the natural level of output when the actual price level level that people expected.