b)  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 . What happens to the unemployment rate?C) Use the sticky-warge theory of aggregate supply to explain what will happen to output and the price level in the long run(assuming no change in policy).What role does the expected price level play in this adjustment? Be sure to illustrate your analysis in a graph.

Question
Asked Nov 18, 2019
61 views

b)  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 . What happens to the unemployment rate?

C) Use the sticky-warge theory of aggregate supply to explain what will happen to output and the price level in the long run(assuming no change in policy).What role does the expected price level play in this adjustment? Be sure to illustrate your analysis in a graph.

check_circle

Expert Answer

Step 1

b.
The aggregate demand is the summation of all the individual demands in the economy. There will be many different types of demands such as the consumption demand, investment demand, government demand and the net exports. These are the different demands from the various economic agents of the economy. The summation of all these demands is known as the aggregate demand.

Step 2

When there is a stock market collapse in the economy, the stock market collapse would impact the aggregate demand by shifting the aggregate demand to the left. This is because, any changes in the non-price factors causes the aggregate demand curve to shift rather than a movement along the same AD curve. In this case, a stock market collapse means a negative impact and thus, the AD curve would shift towards the left due to the fall in the disposable income in the economy.

Step 3

When the AD curve shifts to the left, it will have the adverse impact over the short run output due to the fall in the demand. ...

Long-Run
Aggregate Supply
Price Level
Short-Run Aggregate Supply 1
Short-Run Aggregate Supply 2
A
Aggregate Demand 1
Aggregate Demand
0
Quantity of Output
help_outline

Image Transcriptionclose

Long-Run Aggregate Supply Price Level Short-Run Aggregate Supply 1 Short-Run Aggregate Supply 2 A Aggregate Demand 1 Aggregate Demand 0 Quantity of Output

fullscreen

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in

Business

Economics

Aggregate Demand

Related Economics Q&A

Find answers to questions asked by student like you

Show more Q&A add
question_answer

Q: How would you draw a firm graph from a perfectly competitive constant cost market in the short run w...

A: A constant cost market means that the cost in the industry remains constant. This is due the feature...

question_answer

Q: Economics Question

A: a. The equilibrium price can be calculated by equating the given demand and supply function as follo...

question_answer

Q: Consider the local cable company, a natural monopoly. The following graph shows the monthly demand c...

A: When there is no price control over the monopoly, the monopolist would maximize his profit from the ...

question_answer

Q: 13. If decision makers adjust fully to demand stimulus policies, persistent expansionary macro-polic...

A: The expansionary macroeconomic policies are an attempt to boost aggregate demand, increase output, i...

question_answer

Q: Hello, I would like some help in another assignment (also step by step). Thank you!

A: Hello. Since your question has multiple sub-parts, we will solve first three sub-parts for you. If y...

question_answer

Q: help me it is travel method problem

A: suppose,The admission to euro land = 150 euros per person.Transportation cost including time cost= 1...

question_answer

Q: This is the third part of the question. The graphs will be attached.      On the monopoly graph, use...

A: Intersecting point of supply and demand curve of Hot dogs is the equilibrium point of the Hot dogs m...

question_answer

Q: Suppose the California legislature passed a sweeping law to lower the number of regulations for buil...

A: In this case sweeping law will empowers California government to make necessary law and give proper ...

question_answer

Q: Fact 21 Eileen has 2.5% of her earnings deposited into her retirement plan. If $150 per month is dep...

A: Given:2.5 % of her earnings are deposited into her retirement planDeposited retirement every month =...