Question

Please fill in the blanks with appropriate option.

1. A dramatic decrease in tax rates for all Americans over a period of several years leads to a massive, positive demand shock. Before the market has time to adjust, the result of this positive demand shock is ________
2. As the economy responds to gaps caused by different shocks, the focus shifts to the ________ which is the difference between actual output and potential output.
3. A sudden movement of the AD curve, in a positive or negative direction, is known as __________.
4. Due to several months of negative performance, consumer confidence and expectations in the stock market fall dramatically, leading to a negative demand shock. The resulting situation will create an _________.
5. __________ is a sudden movement of the SRAS curve in either a positive or negative direction.
6. After adjusting to the effects of shocks, the economy experiences an eventual return to equilibrium in the long run. This is due in large part to the ability of the economy to undergo an ____________.

Answer 1

Answer: Please refer to Explanation

Step-by-step explanation:

1. Inflationary Gap.

Due to the availability of more disposal income due to tax cuts, more amount is being spent on consumption leading to a rise in actual GDP which is more than the potential GDP as the economy has not adjusted.

2. Output Gap.

This is the difference between the Actual GDP and the Potential GDP.

3. Demand Shock

This increases or reduces Aggregate Demand due but only temporarily.

4. Recessionary Gap.

This is where actual GDP falls below Potential GDP.

5. Supply Shock.

Like a demand shock, it suddenly increases or reduces the supply of goods and services. It is temporary as well.

6. Self Correction

Economists believe that in the long run, the Economy is capable of adjusting to shocks and returning to it's potential and natural levels.