1. Suppose the stock market crashes lowering output and raising the price level in the short...

1. Suppose the stock market crashes lowering output and raising the price level in the short run. If policymakers do nothing,

a. the price level would further decline as the economy reaches a new long-run equilibrium.

b. the price level would eventually increase as the economy reaches a new long-run equilibrium.

c. the price level would stay at the same level as in the short-run equilibrium that followed the stock market crash.

d. None of the above is correct.

Expert Solution

Question 1

When the stock market crashes, it leads to a decrease in aggregate demand due to the negative wealth effect.

This decrease in aggregate demand leads to fall in output and price level.

Fall in output implies lower production being undertaken in the economy which in turn will lead to a fall in employment and will put downward pressure in wages.

As wages will decline, the cost of production of firms will also decrease.

This decrease in the cost of production will increase the profit margin of firms and would induce them to produce more.

This will lead to an increase in aggregate supply. Eventually, the short-run aggregate supply curve will shift to the right and would bring the economy to a new long-run equilibrium with the further lower price level.

So,

Suppose the stock market crashes lowering output and raising the price level in the short run. If policymakers do nothing, the price level would further decline as the economy reaches a new long-run equilibrium.

Hence, the correct answer is the option (a).

Rahul Sunny answered 2 years ago

1. At the current level of output, suppose the actual price level is less than the...

1. At the current level of output, suppose the actual price level is less than the price level that individuals expect (i.e., Pt < Pet). We know that: A. output is currently below the natural level of output. B. the interest rate will tend to rise as the economy adjusts to this situation. C. the nominal wage will tend to increase as individuals revise their expectations of the price level. D. any subsequent reduction in the aggregate price level will...

1. Suppose stock market crashes. What kind of fiscal policy should the government use in the...

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.

1. Suppose a perfectly competitive firm in the short-run is currently producing an output level of...

1. Suppose a perfectly competitive firm in the short-run is currently producing an output level of 50,000 units, charging a price per unit of $4. The firm incurs variable costs of $280,000 in producing this level of output. It also has fixed costs of $60,000. a) Calculate the economic profit (or loss) from the firm producing and selling these 50,000 units of output. b) Calculate the economic profit (or loss) from the firm shutting down and producing zero units. c) Given the correct...

Suppose the output or goods market is in equilibrium and the level of taxes in that...

Suppose the output or goods market is in equilibrium and the level of taxes in that country is increased. How does this affect the output market? Explain your answer through the sequence of change(s) on any variable(s) involved.

Suppose a perfectly competitive firm in the short-run is currently producing an output level of 50,000...

Suppose a perfectly competitive firm in the short-run is currently producing an output level of 50,000 units, charging a price per unit of $4. The firm incurs variable costs of $280,000 in producing this level of output. It also has fixed costs of $60,000. a) Calculate the economic profit (or loss) from the firm producing and selling these 50,000 units of output. Show all your work. (2 points) b) Calculate the economic profit (or loss) from the firm shutting down...

1. Suppose that the price level in the United States is 135 and the price level in...

1. Suppose that the price level in the United States is 135 and the price level in Germany is 234. What would absolute purchasing power parity theory predict the dollar/euro exchange rate to be? 2. If the United States rate of inflation is 2% and the German rate of inflation is 5%, what would relative purchasing power parity predict about the value of the euro relative to the dollar, all other things equal?

A competitive for maximizes profit and an output level of 500 units market price is $24...

A competitive for maximizes profit and an output level of 500 units market price is $24 average total cost is $24 50 cents at what range of average variable cost values for an output level of 500 would the firm choose not to shut down

1) Suppose volatility of the stock market is 20%. Suppose I always short stocks. What would...

1) Suppose volatility of the stock market is 20%. Suppose I always short stocks. What would be the volatility of the return of my strategy? (Please answer in percent. For instance, if your answer is -5%, answer -5 below) 2) Suppose a fund achieves an average return of 10%. Assume that risk-free rate is 0% and market risk premium is 10%, and this fund has a beta of 1.5. What is the alpha of this fund? (Answer in percent. For...

4. The economy's short-run equilibrium price level and aggregate output (income) are found at the intersection...

4. The economy's short-run equilibrium price level and aggregate output (income) are found at the intersection of the aggregate demand (AD) and aggregate supply (AS) curves. Recall that the price level is located on the y-axis and output (income) on the x-axis. Which of the following would cause a new equilibrium with a lower price level and a higher output (income)? O A. A rightward shift in AD. O B. A rightward shift in AS. O C. A leftward shift...

How do stock market crashes relate to market failure in the financial industry?

Question