The following questions relate to long-run macroeconomic equilibrium and the stock market boom.
Assume that a hypothetical economy is at long-run macroeconomic equilibrium, with full employment and stable prices. Suddenly the stock market prices increased much more than expected, increasing investors’ wealth, and causing a short-term period of unusually increased optimism about the future of the economy.
a. In the short-run, will the AS curve or the AD curve shift, and in which direction will it shift?
b. In the short-run, what will happen to the price level and the quantity of output (real GDP)?
c. Explain what, if any, impact there will likely be on workers’ wages and the reasons for this impact.
d. In the long-run, which curve will shift due to the change in wages and price expectations created by the stock market boom? In which direction will it shift?
e. When the economy returns to its long-term output level, how will the new long-run macroeconomic equilibrium differ from the original equilibrium?
