EC140 OC - Quiz 6 Bonus Question 7Ce - Answer PDF

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EC140OC – Quiz 6 Bonus Question - Answer

Scenario 14-2 The economy is in long-run equilibrium. Suddenly, due to corporate scandals, a recession experienced by a major trading partner, and the loss of confidence among policymakers, citizens become pessimistic concerning the future. They maintain this level of pessimism for a long time. Refer one? a) b) c) d)

to the Scenario 14-2. How does the new long-run equilibrium differ from the original Both the price level and real GDP are higher Both the price level and real GDP are lower The price level is the same and real GDP is lower The price level is lower and real GDP is the same

Explanation: Scenario 14-2 is consistent with a negative aggregate demand shock (i.e. corporate scanals, a recession and loss of confidence are all factors that shift the aggregate demand curve to the left). Furthermore a negative aggregate demand shock is described in the notes. Below is the diagram for a negative aggregate demand shock where the economy starts out at point A and eventually goes to point C. Please check class notes for a more detailed explanation....