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A sudden crash in the stock market shifts a. the aggregate-demand curve. b. the short-run aggregate-supply curve, but not the long-run aggregate-supply curve. c. the long-run aggregate-supply curve, but not the short-run aggregate-supply curve. d. both the short-run and the long-run aggregate-supply curves.

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Principles of Macroeconomics (Mind...

7th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781285165912

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Chapter
Section
BuyFindarrow_forward

Principles of Macroeconomics (Mind...

7th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781285165912
Chapter 20, Problem 2QCMC
Textbook Problem
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A sudden crash in the stock market shifts

a. the aggregate-demand curve.

b. the short-run aggregate-supply curve, but not the long-run aggregate-supply curve.

c. the long-run aggregate-supply curve, but not the short-run aggregate-supply curve.

d. both the short-run and the long-run aggregate-supply curves.

To determine
The impact of sudden stock market crash on economy.

Explanation of Solution

The stocks and bonds are the money market instruments in the economy. There will be special market places for buying and selling of these stocks and bonds in the economy and such market which are especially for the exchange of the stocks and bonds are known as the stock markets. The stocks will be the items which will be traded in the market.

Option (a):

When the stock market crashes all of a sudden, people will face loss and as a result, they will reduce their consumption expenditures which will lead the aggregate demand curve in the economy shift towards the left because the aggregate demand curve is the summation of all individual demands in the economy. Thus, option 'a' is correct.

Option (b):

The aggregate supply curve is the aggregation of all the supply curves of the firms in the economy. When the stock market crashes in the economy, it cannot have any sudden impact on the supply and as a result, neither in the short run nor in the long run, it will have impact on the aggregate supply curve...

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