The US economy was hit two shocks at the onset of the 2008 Global Financial crisis....

The US economy was hit two shocks at the onset of the 2008 Global Financial crisis. First, it faced a negative supply shock due to a doubling of the price of oil, large price increases in other commodities and the collapse of a domestic housing bubble. Soon after, a negative aggregate demand shock followed, as consumer optimism dropped, while a reduction in credit supply in the financial sector caused firms to cut back on their investment plans.

Using the AS/AD model and assuming that the economy is initially at its long-run equilibrium (where output is equal to Y*), show on a graph what happens in the short-run to inflation and output when the economy is hit by a negative demand shock such as a drop in consumer optimism or firm investment.

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Rahul Sunny answered 6 months ago

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