The graph below shows the economy in long-run equilibrium at the expected price

Question

The graph below shows the economy in long-run equilibrium at the expected price level of 120 and the natural rate of output of $300 billion. Suppose a stock market boom increases household wealth and causes consumers to spend more. Shift the short-run aggregate supply (AS) curve or the short-run aggregate demand (AD) curve to show the short-run impact of the stock market boom. Tool tip: Click and drag the appropriate curve. Curves will snap into position, so if you try to move the curve and it snaps back to its original position, just try again and drag it a little further. In the short run, the increase in consumption spending associated with the stock market expansion shifts the curve to the , causing the price level to the price level people expected and the quantity of output to the natural rate of output. The stock market boom will cause the unemployment rate to the natural rate of unemployment in the short run.

Explanation / Answer

AD

right

increase above

increase above

decrease below

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