Question

If there is a negative demand shock,

a.) Please explain ‘no policy response’ case.

b.) Please explain ‘policy stabilizes economic activity in the short run’ case.

please short answer

Answer 1

a) In 'no policy response case' the aggregate demand curve will shifts leftwords, this will decrese the output level and the inflation rate and the long run equilibrium is attained with inflation rate permanently decreased.

b) Initially the aggregate demand curve will shift leftwords, with decreasing output and inflation rate, with the help of expansionary monitory policy or easy monitory policies the aggregate demand is increased, this will again shift the aggregate demand curve in right direction and the economy will attain the new long run equilibrium with stabalized inflation rates.