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Assuming the economy is in long-run equilibrium, using an AS/AD diagram, demonstrate graphically and explain verbally...

Assuming the economy is in long-run equilibrium, using an AS/AD diagram, demonstrate graphically and explain verbally the long-run impact on the price level and real output of an expectation by business executives of a recession in the near future.

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The business man will be very pessimistic about the future if he expect a recession in the future so he will cut out the further investments and lays off the workers. And this will decrease the investment expenditure in the economy and will shift the aggregate demand curve to the left from AD to AD 1 in the short run. So in the short run the price level and the real output will decrease. In the long run the the supply curve would shift to the right and the output will be back at the original level with the decreased price level. The final output will be only a decrease in the price level in the long run.

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