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 a another new equilibrium point. The stock market crash is temporary, so as the economy works its way back to long-run equilibrium, real GDP will increase. As the expected rate of inflation changes, the economy will move from A) point A to point C.
B) point D to point C.
C) point A to point D.
D) point B to point C.
D
You might also like to view...
If an economy experiences deflation, the real interest rate
A) will be less than the nominal interest rate. B) will be negative when the nominal interest rate is positive. C) will be greater than the nominal interest rate. D) will be equal to the deflation rate, so long as the nominal interest rate is positive.
Asset price bubble is an increase in the price of assets that goes far beyond what can be justified by improving the fundamentals.
Answer the following statement true (T) or false (F)