question archive Assume the Australian economy is initially in long-run equilibrium, with real GDP equal to $1
Assume the Australian economy is initially in long-run equilibrium, with real GDP equal to $1
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Assume the Australian economy is initially in long-run equilibrium, with real GDP equal to $1.5 trillion. Suppose, now, that there is a global stock market crash, which reduces real wealth significantly, shifting aggregate demand (AD) to the left, and reducing real output, in the short run, by $60 billion. If neither the government nor the reserve bank changes their policies in response to this shock, then, ceteris paribus, in the long run:
a. The economy would stay stuck, with GDP at $1.44 trillion.
b. The economy would recover because AD would automatically move back.
c. The economy would recover because the LRAS would move to the right.
d. The economy would recover because the SRAS would move to the right.
e. None of the above.
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If neither the government nor the reserve bank changes their policies in response to this shock, then, ceteris paribus, in the long run, the economy would recover because AD would automatically move back. (B).
Holding all factors constant, a recovery will be experienced as the aggregate demand falls back to the original position. This is because this is a short-run aggregate demand and the type of fluctuation that is emanating from the aggregate demand is short-lived.
Therefore, the aggregate demand will shift back to the initial position.
