AB 204 STUDY Extraordinary Success/ab204study.com AB 204 STUDY Extraordinary Success/ab204study.com | Page 11

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.