Final_question_6_help - 1.

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1. 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.  b. Firms come to believe that a recession in the near future is likely.  c. Anticipating the possibility of war, the government increases its purchases of  military equipment.  d. The quantity of money in the economy declines and interest rates increase. Answer a. A stock market boom increases the value of stocks held by households:   This will  result in higher consumer spending which will increase aggregate demand. As a result,  economy will face Inflationary gap. Contractionary fiscal policy would help move the  economy back to potential output. b. Firms come to believe that a recession in the near future is likely:  In this case,  economy will face recessionary gap. Expansionary fiscal policy would help move the 
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This note was uploaded on 05/17/2011 for the course ECONOMICS 204 taught by Professor Perti during the Spring '11 term at Kaplan University.

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Final_question_6_help - 1.

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