Question

Refer to Financial Crisis. Suppose the economy reaches long-run equilibrium without the Fed responding. Now suppose the financial crisis ends and the ability of banks to lend returns to normal. In which case is the price level lower compared to its value prior to the crisis?

Answer 1

Answer: A. After the economy reached long run equilibrium during the crisis and not when it reaches long run equilibrium during the crisis.

Step-by-step explanation:

The reason for that is because during the crisis, the buying power of the people is affected. Hence both the demand and supply go decreases. But when it reaches long run equilibrium, gradually the supply curve tends to shift to the right and people start to buy as the banks are ready to lend and people are able to borrow. So basically the situation would be just the same as it was before the crisis. Once the economy has attained long run equilibrium after the crisis.