Figure 14.3

-Refer to Figure 14.3.Suppose the economy is initially at long-run equilibrium and the economy experiences a demand shock such as a stock market crash.The economy then reaches a new,short-run equilibrium point.Assuming expectations are adaptive,this will allow the central bank to decrease the real interest rate,moving the economy to another new equilibrium point.The stock market crash is temporary,so the next movement on the path to the long-run equilibrium will be from

Question

Figure 14.3

-Refer to Figure 14.3.Suppose the economy is initially at long-run equilibrium and the economy experiences a demand shock such as a stock market crash.The economy then reaches a new,short-run equilibrium point.Assuming expectations are adaptive,this will allow the central bank to decrease the real interest rate,moving the economy to another new equilibrium point.The stock market crash is temporary,so the next movement on the path to the long-run equilibrium will be from

Quizplus · Accepted Answer

The stock market crash is a negative demand shock, which shifts the AD curve to the left. This causes the economy to move from point A to point B in the short run. With adaptive expectations, the central bank can then decrease the real interest rate, which shifts the AD curve back to the right. This causes the economy to move from point B to point C.

Figure 14.3 -Refer to Figure 14.3.Suppose the Economy Is Initially at Long-Run