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1.Consider that the economy is initially in long-run equilibrium (i.e.,, but then it is faced with a sharp decline in stock and housing prices. Using
1.Consider that the economy is initially in long-run equilibrium (i.e.,, but then it is faced with a sharp decline in stock and housing prices. Using the IS-LM and AD-AS models, illustrate and explain what happens to r, Y, P, C, and I in the short run. If the government or the Fed does not intervene, how does the economy return to long-run equilibrium? What happens to r, Y, P, C, and I in the long run? (Note: Assume that prices are rigid in the short run.)
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