In the short run, the decrease in investment spending associated with business pessimism causes the aggregate demand curve to shift to the left, resulting in a lower-than-expected price level (100) and a quantity of output ($500 billion) that falls short of the natural level of output. The decrease in production causes firms to lay off workers, so the unemployment rate will rise above the natural rate of unemployment.

The decrease in investment spending associated with business pessimism shifts the aggregate demand curve leftward in the short run, resulting in a lower-than-expected price level, and output below the natural level of output. During the transition from the short run to the long run, the public's price-level expectations will begin to adjust to lower levels. As lower price-level expectations work their way into price and wage contracts, it becomes less costly for firms to hire workers and buy inputs. Consequently, they will expand production at any price level. This is reflected in a rightward shift of the short-run aggregate supply curve (AS). In the long run, the decrease in investment spending associated with business pessimism results in a lower price level, but output returns to the natural level of output and unemployment returns to the natural rate of unemployment.