Figure 12.4

Scenario: The above figures represent the economy of Mondolvia, where points A, B, C, and D in the first figure reflect the corresponding points in the second figure. The economy of Mondolvia is initially at equilibrium with real GDP equal to potential GDP. In April 2012, Mondolvia reached the peak of a rapid housing bubble that dramatically increased consumer wealth. The central bank of Mondolvia recognized this housing bubble peak existed in June, 2012 and implemented corrective policy in August 2012. The corrective policy actually changed output in the economy 12 months after it was implemented. In the meantime, the housing bubble burst in December 2012, returning the economy back to its initial, pre-bubble equilibrium level.
-Refer to Figure 12.4.Since the housing bubble burst and the economy returned to its initial,pre-bubble level before the corrective policy changed output,the economy actually moved from ________ after the bubble burst.

Question

Figure 12.4

Scenario: The above figures represent the economy of Mondolvia, where points A, B, C, and D in the first figure reflect the corresponding points in the second figure. The economy of Mondolvia is initially at equilibrium with real GDP equal to potential GDP. In April 2012, Mondolvia reached the peak of a rapid housing bubble that dramatically increased consumer wealth. The central bank of Mondolvia recognized this housing bubble peak existed in June, 2012 and implemented corrective policy in August 2012. The corrective policy actually changed output in the economy 12 months after it was implemented. In the meantime, the housing bubble burst in December 2012, returning the economy back to its initial, pre-bubble equilibrium level.
-Refer to Figure 12.4.Since the housing bubble burst and the economy returned to its initial,pre-bubble level before the corrective policy changed output,the economy actually moved from ________ after the bubble burst.

Quizplus · Accepted Answer

The correct answer is point A to point C. Before the housing bubble burst, the economy was at point B, which represented a temporary equilibrium output level above potential GDP due to the bubble. After the bubble burst, the economy returned to its initial equilibrium level at point A. Therefore, the economy moved from point A to point C, representing a decrease in output below potential GDP due to the burst of the housing bubble.

Figure 12.4 Scenario: the Above Figures Represent the Economy of Mondolvia, Where