Suppose the Economy Is Initially in Long-Run Equilibrium

question 16

Essay

Suppose the economy is initially in long-run equilibrium.For each of the shocks listed below,explain the short-run effects on output and the price level.
(a)A stock market crash reduces consumers' wealth.
(b)Businesses decide to hold larger inventories.
(c)The government cuts defense spending.
(d)Foreign countries buy more U.S.goods.

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Definitions:

Cocktail-Party Phenomenon

The ability to focus one's auditory attention on a particular stimulus while filtering out a range of other stimuli, as if at a noisy party.

Broadbent's Filter Theory

A theory suggesting that information is filtered through a selective attention mechanism that allows only a portion of sensory inputs to reach consciousness.

Sensory Modalities

The ways through which living organisms perceive their environment, such as sight, smell, touch, taste, and hearing.

Memory Tasks

Activities or exercises designed to test or improve the ability to recall information or experiences.