The Stock Market Boom of 2010
Imagine that in 2010 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time.
-Refer to Stock Market Boom 2010.Which curve shifts and in which direction?
A)aggregate demand shifts right
B)aggregate demand shifts left
C)aggregate supply shifts right
D)aggregate supply shifts left.

Question

Quizplus · Accepted Answer

If there is an unexpected increase in stock prices, people will feel wealthier and will increase their spending, shifting the aggregate demand curve to the right. This shift in AD will increase output, employment, and prices in the short run. However, if the economy is already in long-run equilibrium, this shift in AD will lead to inflationary pressures in the long run due to the inability of the economy to increase output beyond its full-employment level. Therefore, the correct answer is A) aggregate demand shifts right.