Figure 7-3 -Refer to Figure 7-3. Suppose that the economy is in long-run equilibrium at point A. Now suppose the stock market crashes, significantly reducing household wealth. As a result, A) the economy's potential output decreases to Y₃. B) unemployment is below its natural rate. C) the economy moves to a new long-run equilibrium at point C. D) there is some cyclical unemployment.

Question

Quizplus · Accepted Answer

A stock market crash reduces household wealth, leading to decreased consumption and aggregate demand. This results in a recessionary gap, causing cyclical unemployment as the economy temporarily operates below its potential output.

Figure 7-3 -Refer to Figure 7-3. Suppose That the Economy Is in Economy