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Question #3: AD-AS Model [14 Points] When the stock market rises, there is an increase in household wealth and consumers feel more confident about the
Question #3: AD-AS Model [14 Points] When the stock market rises, there is an increase in household wealth and consumers feel more confident about the economy and as a result consumption increases. (a) Assume that the U.S. economy was initially at its potential output level ( Y ). Graphically illustrate using the AS-AD model the effect of higher consumption levels on the U.S. economy. Be sure to label the axes, curves, use arrows to show shifts in curves, and market the equilibrium points: "A" for initial equilibrium; "B" for the short-run equilibrium; "C" for the long-run equilibrium. [8 Points]
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