Answer Happy

- 3. An economy is in long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. What kind of gap - inflationary or recessionary - will the economy face after the shock, and what type of fiscal policies would help move the economy back to potential output? How would your recommended fiscal policy shift the aggregate demand curve? a. A stock market boom increases the value of stocks held by households. b. Firms come to believe that a recession in the near future is likely. c. Anticipating the possibility of war, the government increases its purchases of military equipment. d. The quantity of money in the economy declines and interest rates increase. 4. During a 2008 interview, then German Finance Minister Peer Steinbruck said, "We have to watch out that in Europe and beyond, nothing like a combination of downward economic [growth] and high inflation rates emerges - something that experts call stagflation. Such a situation can be depicted by the movement of the short-run aggregate supply curve from its original position, SRAS, to its new position, SRAS,, with the new equilibrium point E, in the accompanying figure. In this question, we try to understand why stagflation is particularly hard to fix using fiscal policy.