Between 2006 and 2009 homeowner's equity in real estate fell by more than half as the US housing bubble burst, leading to a sharp decline in consumer wealth.

Would you expect this event to result in a recession or an expansion? Explain in words what will happen to prices, output, and unemployment in the short-run.

Use one of the following theories to explain clearly why short-run output might deviate from potential output in this case, and how the economy will return to the long-run rate of output. Be sure to clearly indicate which theory you are using.

i. Sticky Wage Theory

ii. Sticky Price Theory

iii. Misperceptions Theory

Describe how the government might use fiscal policy in this situation in order to reduce the magnitude of the short-run economic fluctuation?