An economy in a hypothetical country is in long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. What kind of gap—inflationary or recessionary—will the economy face after the shock, and what type of fiscal policies, giving specific examples, would help move the economy back to potential output?
a. A stock market boom increases the value of stocks held by households.
b. Anticipating the possibility of war, the government increases its purchases of military equipment.
c. The quantity of money in the economy declines and interest rates increase.