For each of the following parts make sure to provide a detailed explanation of the steps involved. Also indicate what happens to GDP, Price Level and Unemployment.
The economy is currently in Long Run equilibrium at $8 trillion
A) Draw the AS/AD graph depicting the current situation, label the equilibrium “A”
B) A stock market crash causes households and businesses to become skeptical about the future economy. Show the effect on your graph and label the SR eq “B”
C) If there is no government intervention, show where the long run equilibrium ends up, label it “C”
D) If instead the Fed decides to use monetary policy to respond to part B, show where the LR eq ends up, label it “D”
E) If instead the government responded by using fiscal policy (again starting from B), show where the long run equilibrium ends up, label it “E”
F) Starting from A, what happens if the economy gets supply shock? Graph it on a new graph and label it “B”
G) Show the outcome of using fiscal and monetary policy, label it C. Compare and contrast the results with the previous example.
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