An economy is inlong-run macroeconomic equilibrium when each of the followingagg

Question

An economy is inlong-run macroeconomic equilibrium when each of the followingaggregate demand shocks occurs. What kind of gap—inflationaryor recessionary—will the economy face after the shock, andwhat type of fiscal policies would help move the economy back topotential output?

a. Astock market boom increases the value of stocks held byhouseholds.

b.Firms come to believethat a recession in the near future islikely.

c. Anticipating the possibility of war,the government increases its purchases of militaryequipment.

d. The quantity of money in the economydeclines and interest rates increase.

Explanation / Answer

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