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3. An economy is in long-run macroeconomic equilibrium when each

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3. An economy is in long-run macroeconomic equilibrium when
each of the following aggregate demand shocks occurs. What
kind of gap—inflationary or recessionary—will the economy
face after the shock, and what type of fiscal policies would
help move the economy back to potential output?
a. A stock market boom increases the value of stocks held by
b. Firms come to believe that a recession in the near future is
c. Anticipating the possibility of war, the government increases
its purchases of military equipment.
d. The quantity of money in the economy declines and interest
rates increase.

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