On Oct. 24, 1929 there was a widespread decline in stock prices,a phenomenon known as a stock market crash. This stock market crashis commonly viewed as the beginning of the recession known as theGreat Depression.
A) On a graph, use the traditional IS-LM model to analyze howthe economy responds in the short-run and the long-run in responseto a stock market crash (i.e. a sudden decline in householdwealth). What happens in the short-run and the long-run to output,the real interest rate and the aggregate price level? (10pts)
B) According to the traditional IS-LM model, how should have theFederal Reserve responded to this stock market crash? Explain youranswer. (5pts)
On Oct. 24, 1929 there was a widespread decline in stock prices, a phenomenon known as a stock market crash. This stock
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