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1 . 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 .
2 ) Studies indicate that net exports and net capital outflows tend to be equal .
a ) Why do net exports and net capital outflows tend to be equal ? How does an increase in the price level change interest rates ?
b ) How does this change in interest rates lead to changes in investment and net exports ?
3 ) Assume there is a decrease in the demand for goods and services , which leads to a decrease in the real GDP and eventually the economy into recession .
a ) When the economy enters recession due to a decline in demand , what will happen to the price level ?
b ) Assume there is no government intervention . What will ensure that the economy still eventually gets back to the natural rate of output ( real GDP )?
4 ) A number macroeconomic variables decline during recessions . One of these variables is the GDP .
a ) What other variables , besides real GDP , tend to decline during recessions ? Given the definition of real GDP and its components , explain the declines in these economic variables which are to be expected .