Due to a bust of stock prices, consumer wealth declines, and consumer confidence drops dramatically. Use the AD-AS model to predict what happens to the economy, both graphically and verbally.
1. What happens to aggregate demand?
2. What happens to the level of output and the price level, both in the short-run and the long run?
3. What happens to unemployment in the short run according to Okun’s law?
4. What Fed policies can be used to stabilize the economy?