An economy is in long-run macroeconomic equilibrium when each of the following a

Question

An economy is in long-run macroeconomic equilibrium when

each of the following aggregate demand shocks occurs. What

kind of gap—inflationary or recessionary—will theeconomy

face after the shock, and what type of fiscal policies would

help move the economy back to potential output?

a. A stock market boom increases the value ofstocks held by

households.

b. Firms come to believe that a recession inthe near future is

likely.

c. Anticipating the possibility of war, thegovernment increases

its purchases of military equipment.

d. The quantity of money in the economydeclines and interest

rates increase.

Explanation / Answer

A) Expansionary - due to increase in wealth, thus C>0 B) Recessionary - because investments into inventories will fallI0 But also depends on where gov will get resources to finance it'sprojects... D) Recessionary - LM

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