1. The chapter suggests that the economy, like the human body, has “natural restorative powers.”

a. Illustrate the short-run effect of a fall in aggregate demand using an aggregate-demand/aggregatesupply diagram. What happens to total output, income, and employment?

b. If the government does not use stabilization policy, what happens to the economy over time? Illustrate on your diagram. Does this adjustment generally occur in a matter of months or a matter of years?

c. Do you think the “natural restorative powers” of the economy mean that policymakers should be passive in response to the business cycle?