While evidence shows that the Global Financial Crisis (GFC) impacted firms (small to large), it is generally accepted (and shown by empirical studies) that the GFC predominantly impacted on households/consumer spending (i.e., on aggregate demand). Assume this is the case. Also assume that there is no fiscal policy response from the government. 1. Explain and illustrate the short-run effect of the GFC on macroeconomic equilibrium using the AD-AS model. 2. Explain and illustrate the adjustment process to back to long-run equilibrium based on the following Self-correcting mechanism (i.e., with no policy response i. ii. Active stabilisation response (i.e., with policy response).

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