Suppose the economy is in a long-run equilibrium

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Problems and Applications Q1

Suppose the economy is in a long-run equilibrium, as shown in the following graph.

Now suppose that a stock market crash causes aggregate demand to fall.

Use your diagram to show what happens to output and the price level in the short run.

Aggregate Demand Aggregate Supply LRAS Price Level Quantity of Output Aggregate Demand Aggregate Supply LRAS

As a result of this change, the unemployment rate

Use the sticky-wage theory of aggregate supply to think about what will happen to output and the price level in the long run (assuming there is no change in policy).

On the previous graph, illustrate the change that will occur in the long run.

Reference no: EM13773894

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