Long-run Macroeconomic Equilibrium and Stock Market Boom
Let us assume the economy reaches its long-run macroeconomic equilibrium in 2020. When the economy is in the long run macroeconomic equilibrium, the stock market will also reach its boom.
This will in turn lead to increases in stock prices more than expected, and the stock prices will stay high for some period.
Answer the following questions based on the scenarios of long macroeconomic equilibrium and consequent stock market boom.
1) Which curve will shift? Is it AS curve or AD curve? In which direction does the shift occur?
2) In the short-run, what will happen to the price level and output (real GDP)?
3) What will happen to the expected price level? What impact does this have on wage bargaining power of workers?
4) In the long-run, which curve will shift due to the change in price expectations created by the stock market boom? In which direct will it shift?
5) How does the new long-run macroeconomic equilibrium differ from the original equilibrium?