1. Draw an ADAS graph at equilibrium. Suppose the stock market crashes. Which curve will shift? Draw the new equilibrium. InstructionsYou will draw four separate Aggregate-Demand/Aggregate-Supply graphs. Each graph will have one curve shift. Be sure to label axis, curves, and equilibrium.Change colors to show the shift and label the new equilibrium.

Stock market crashes means sudden decline in stock prices which is a great loss to the existing investors in the stock market.As their stock values decrease their wealth declines. Wealth and purchasing power are positively related each other. Rise in wealth increases the purchasing power of the wealth holder and vice versa. As we know that Economy achieves equilibrium in long run when LRAS=SRAS=AD. This is the full employment equilibrium condition where price and output are determined in long run. 1. AD, SRAS and LRAS are the aggregate demand, short term aggregate supply curve and long run aggregate supply curve respectively. at E point economy is in equilibrium where LRAS=AD=SRAS. where price level is P* and output level is Y* 2. Stock market shock will decrease the securities price and existing investor's wealth reduces drastically which decreases their purchasing power in the economy due to the wealth effect. Decline in purchasing power due to decrease in wealth as stock market crashed it will shift the AD curve to the left from AD to AD1. 3. This shift brings the economy at under full employment equilibrium level from E to E1. and price level reduces to P1 and output reduces to Y1. Aggregate demand curve will shift to the left.

Answered: Draw an ADAS graph at equilibrium.…

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Draw an ADAS graph at equilibrium. Suppose the stock market crashes. Which curve will shift? Draw the new equilibrium.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Laffer Curve Analysis

In terms of economics, the Laffer curve was popular among those economists who were or who belonged to the supply side of the economic peripheral. This concept was popularized by the famous supply-side economist known as Arthur Laffer. This curve illustrated the relationship between the tax rates and government revenue. It is already known that the tax which the public or individuals residing in an economy bear is the revenue or income of the government with the help of which the government does all the necessary works in the society, which is beneficial for the economy.

Question

1. Draw an ADAS graph at equilibrium. Suppose the stock market crashes. Which curve will shift? Draw the new equilibrium.

Instructions
You will draw four separate Aggregate-Demand/Aggregate-Supply graphs. Each graph will have one curve shift. Be sure to label axis, curves, and equilibrium.
Change colors to show the shift and label the new equilibrium.

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