The "tech bubble" burst of 2000,the terrorist attacks of 2001 and the corporate scandals of 2001 and 2002 all had similar qualitative effects on the economy.Which of the following is an appropriate description of the mechanism that would have ensued?
A)Household and business spending would have been eroded shifting the AD curve to the left.
B)Unemployment would have risen and inflation would have fallen.
C)Output would have declined below potential but through shifts in the AS curve,the self-correcting mechanism of the AD-AS framework would have brought the unemployment rate down to the lower levels we saw by 2004.
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

The burst of the tech bubble, terrorist attacks, and corporate scandals would have all had negative impacts on household and business spending, leading to a shift in the AD curve to the left (Option A). These events could also have led to rising unemployment (Option B) and a decline in output below potential. However, through shifts in the AS curve, the self-correcting mechanism of the AD-AS framework could have brought the unemployment rate down to lower levels seen in 2004 (Option C). Therefore, all of the options A, B, and C are appropriate descriptions of the economic mechanism that would have ensued.

The "Tech Bubble" Burst of 2000,the Terrorist Attacks of 2001