Use the aggregate demand/aggregate supply framework to answer the following questions:
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Use the aggregate demand/aggregate supply framework to answer the following questions:
(a) A sharp decline in the stock market due to an increase in corporate bankruptcies leads to a decline in consumer and business confidence. What effect would you expect this shock to have on output and inflation in the short-run?
(b) The US government decides to lower military expenditures to reduce the budget deficit. What effect would you expect this shock to have on output and inflation in the shortrun?
(c) State and local governments increase infrastructure spending on highways and bridges boosting potential output. What effect does this shock have on output and inflation in the short-run? What effect does this shock have on output and the inflation in the long-run if monetary policy does not respond?
(d) A surge in violence in the Mideast causes a temporary spike in global oil prices. What effect would you expect this shock to have on output and inflation in the short-run?
(e) A temporary tax rebate is enacted by Congress in an effort to boost reelection prospects. What effect would you expect this shock to have on output and inflation in the shortrun?
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