Reference no: EM132006597

Assume the Australian economy is initially in a long run equilibrium, with real GDP equal to $1.5 trillion. Suppose, now, that there is a global stock market crash -- which reduces real wealth significantly, shifting aggregate demand (AD) to the left, and reducing real output, in the short run, by $60 billion.

If neither the government nor the reserve bank change their policies in response to this shock, then, ceteris paribus, in the long run:

• The economy would stay stuck, with GDP at $1.44 trillion.
• The economy would recover because AD would automatically move back.
• The economy would recover because the LRAS would move to the right.
• The economy would recover because the SRAS would move to the right.
• None of the above.