Question

1. Suppose stock market crashes. What kind of fiscal policy should the government use in the situation? Please draw AD-AS diagram illustrating this policy change. Indicate the starting equilibrium, as well as the effect of stock market crash and then subsequent use of fiscal policy.

Answer 1

A downturn on the stock market is triggering an overall change to the left. The level of equilibrium between production and price would decrease. There was an mistake. The short-term supply curve will change over the period as expectations adapt, and the economy will return to normal production levels. (Fig-1)

Govt Policy:

Expansionary economic policy results in stock markets as economic activity rises. There was a mistake. Stocks are growing as these steps contribute to higher profits and revenues for businesses. In stimulating economic and consumer spending, fiscal policy is very effective.

The aggregate curve of demand shifts right as aggregate demand components: consumption, production, public expenditure and export sales less imports increase. When these components break, the AD curve will move to the left.

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