The following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billionSuppose a stock market boom increases household wealth and causes consumers to spend more.Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the stock market boom240AS200AD160AS12080AD400020040060080010001200PRICE LEVEL Now show the long-run impact of the stock market boom by shifting both the aggregate demand (AD) curve and the short-run aggregate supply (AS)curve to the appropriate positions.?240OAS200AD160AS12080AD400020040060080010001200OUTPUT (Billions of dollars)PRICE LEVEL

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Asked Oct 23, 2019
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Economic fluctuations I

The following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion. Suppose a stock market boom increases household wealth and causes consumers to spend more.
 
Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the stock market boom.
 
In the short run, the increase in consumption spending associated with the stock market expansion causes the price level to    the price level people expected and the quantity of output to    the natural level of output. The stock market boom will cause the unemployment rate to    the natural rate of unemployment in the short run.
 
Again, the following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion, before the increase in consumption spending associated with the stock market expansion.
During the transition from the short run to the long run, price-level expectations will    and the    curve will shift to the       .
 
Now show the long-run impact of the stock market boom by shifting both the aggregate demand (AD) curve and the short-run aggregate supply (AS) curve to the appropriate positions.
 
In the long run, as a result of the stock market boom, the price level    , the quantity of output    the natural level of output, and the unemployment rate    the natural rate of unemployment.
The following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion
Suppose a stock market boom increases household wealth and causes consumers to spend more.
Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the stock market boom
240
AS
200
AD
160
AS
120
80
AD
40
0
0
200
400
600
800
1000
1200
PRICE LEVEL
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The following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion Suppose a stock market boom increases household wealth and causes consumers to spend more. Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the stock market boom 240 AS 200 AD 160 AS 120 80 AD 40 0 0 200 400 600 800 1000 1200 PRICE LEVEL

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Now show the long-run impact of the stock market boom by shifting both the aggregate demand (AD) curve and the short-run aggregate supply (AS)
curve to the appropriate positions.
?
240
O
AS
200
AD
160
AS
120
80
AD
40
0
0
200
400
600
800
1000
1200
OUTPUT (Billions of dollars)
PRICE LEVEL
help_outline

Image Transcriptionclose

Now show the long-run impact of the stock market boom by shifting both the aggregate demand (AD) curve and the short-run aggregate supply (AS) curve to the appropriate positions. ? 240 O AS 200 AD 160 AS 120 80 AD 40 0 0 200 400 600 800 1000 1200 OUTPUT (Billions of dollars) PRICE LEVEL

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Expert Answer

Step 1

Here, with the stock market boom, the consumers/households become wealthier and starts consuming more. Therefore, a rise in households’ income will shift the AD curve rightwards which raises both the price and output. This can be seen from the below diagram where AD shifts to AD’:

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AS orPur Ceuents

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Step 2

The short-run effect of this increase in consumption due to stock market expansion is that the price level rises above the individual’s expectation, the quantity rises above the natural rate of output whereas the unemployment rate falls below the natural rate.

...

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AS AS

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