Question

Suppose the economy begins at potential output when there is a severe and long-lasting stock market crash. In the short run we would expect

a. spending, production and employment to fall
b. spending, production and employment to rise
c. spending and production to fall and employment to rise
d. spending to fall and production and employment to rise

Answer 1

Spending, production and employment to fall

Step-by-step explanation:

A stock market crash brings about an economic condition of a recession or a slump.This brings out reduced economic activity and inflationary pressure builds up. This reduces purchasing powers of people and they demand less thus their spending falls. With increasing costs and less demands the firms are forced to cut down on production to combat costs and they also retrench causing unemployment.

Since the economy is at its potential output level, short term expansionary policies may not work.

Hope that helps.