WendyEller-Assignment-Unit 7

WendyEller-Assignment-Unit 7 - Wendy Eller BU 204-02AU...

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Wendy Eller BU 204-02AU November 30, 2009 Assignment-Unit 7 Chapter 12 Problem 3 An economy is in long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. What kind of gap-inflationary or recessionary-will the economy face after the shock, and what type of fiscal policies would help move the economy back to potential output? A. A stock market boom increases the value of stocks held by households. Answer: An inflationary gap will occur. Contractionary fiscal policies can be used to bring the economy back to potential output. B. Firms come to believe that a recession in the near future is likely. Answer: A recessionary gap will occur. Expansionary fiscal policies can be used to bring the economy back to potential output. C. Anticipating the possibility of war, the government increases its purchases of military equipment. Answer: An inflationary gap will occur. Contractionary fiscal policies can be used to bring the economy back to potential output. D. The quantity of money in the economy declines and interest rates increase. Answer: A recessionary gap will occur. Expansionary fiscal policies can be used to bring the
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WendyEller-Assignment-Unit 7 - Wendy Eller BU 204-02AU...

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