Question

a stock market crash frightens consumers and firms in an economy, all of whom withhold their spending. if government stands by and sits idle, what is the long-run outcome of this inaction?a. output is permanently lower but unemployment bounces backb. unemployment is permanently higher and so are pricesc. output is permanently lower and so are pricesc. unemployment, output, and prices are temporarily higher, but bounce back

Answer 1

The long-run outcome of government inaction during a stock market crash is that output is permanently lower but unemployment bounces back.

Step-by-step explanation:

From a neoclassical perspective, if the government stands by and sits idle during a stock market crash, the long-run outcome of this inaction is that output is permanently lower but unemployment bounces back. When the stock market crashes, consumers and firms become frightened and withhold their spending, leading to a decrease in output.

However, over time, unemployment bounces back as employers adjust by holding down pay increases and potentially replacing higher-paid workers with those willing to accept lower wages. In the long run, the level of output returns to potential GDP, but at a lower level, and there is downward pressure on the price level.