Assume the output market adjusts more rapidly than the asset market. A point of disequilibrium that is below both AA and DD will therefore initially result in
A) an increase in output.
B) a decrease in output.
C) a contraction of the money supply.
D) a depreciation of the home currency.
E) an appreciation of the home currency.

Question

Quizplus · Accepted Answer

If the output market adjusts more rapidly than the asset market, a point of disequilibrium below AA and DD will initially result in a decrease in output. This is because, in the short run, the asset market will not adjust to the new equilibrium level, which causes an increase in interest rates and a decrease in investment. As a result, aggregate demand decreases, leading to a decrease in output.

Assume the Output Market Adjusts More Rapidly Than the Asset