Assume initially-economy is in state of long-run equilibrium

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Assume initially that the economy is in a state of long-run equilibrium. The real GDP equals potential GDP and only natural unemployment exists. Now suppose that consumer confidence plummets and the aggregate demand decreases. What will happen to the general price level (P) and the real GDP (Y) in the short run in the absence of any government policy? Why? What will happen to P and Y in the long run in the short run in the absence of any government policy? Why? Describe the process of self-correcting mechanism from the beginning to the end.

Reference no: EM13998720

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