Suppose that the economy begins in the long-run equilibrium (point A). The weak showing in the real estate market raises worries that firms' expected profits would be reduced. Explain in words and use graphs to illustrate outcomes.
a. Use an aggregate demand and aggregate supply (AD-AS) diagram to show the initial long run equilibrium in the economy. Then, show the effect of the weak real estate market in the short run. Label the graphs clear and explain.
b. Assuming that the government wants to impose fiscal policy, how can government do to close the gap? Explain all possible cases.
c. How does the Fed's action affect price level and real GDP?
d. Assume that neither the Fed nor the government imposes any policies to simulate the economy. How can the economy restore to the long run equilibrium in the economy, using AD-AS diagram and a corresponding Phillip's curve?