An economy is in long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. What kind of gap -inflationary recessionary- will the economy face after the shock, and what type of fiscal policies would help move the economy back to potential output? How would your recommended fiscal policy shift the aggregate demand curve? Use diagrams to answer this question.
a. A stock market boom increases the value of stocks held by households.
b. Firms come to believe that a recession in the near future is likely
c. Anticipating the possibility of war, the government increases its purchases of military equipment.
d. The quantity of money in the economy declines and interest rates increase.