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Explain what happens to the inflation, unemployment, and output gap in the short run in each...

Explain what happens to the inflation, unemployment, and output gap in the short run in each of the following circumstances. do not need to graph but explain which part of IS/MP/PC is affected and why.

1.There is deep recession in China.

2.The stock market crashes and causes consumers to lose confidence in the economy.

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Answer #1


1) The deep recession in China will led to low inflation or deflation, increase output gap and rise in unemployment in short run. The IS curve will shift left as output gap increases and inflation reduces.
2) There will be lower investment confidence and investment demand falls and AD falls (left shift). IS curve shift leftward. This leads to fall in output, reduced inflation and increased unemployment.

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