Question

The Macroeconomy in long- and short-run equilbrium LRAS 100 AD Real GDP (Y) reset Suppose a stock market crash reduces people

Suppose a stock market crash reduces peoples wealth. a. Drag the appropriate line in the correct direction to show the short

options for b:
increase, decrease, return to its initial value

options for d:
increase, decrease, return to its initial value

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Answer #1

a) With a wealth shock consumption declines and AD shifts to the left. This decreases the price level and reduces the level of GDP as well. (Both are correctly filled in)

b) With no government action within the time frame, short run aggregate supply curve will shift to the right as wages are reduced and this causes the price level to reduce further while GDP is restored to its original value. (decreases,  return to its initial value)

c) When action is taken by the government, it should be a fiscal expansion. This can take the form of tax cuts and increased spending. (Both are correctly filled in)

d) Both are correctly filled in.

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