Q21.

Starting from long-run equilibrium, use the basic aggregate demand and aggregate supply diagram (or model) to analyze how the housing market collapse (i.e., a steep fall in the housing prices) in the United States will affect the U.S. economy. Be sure to label the initial equilibrium and new equilibrium including the equilibrium price and equilibrium GDP if you draw a diagram.

***If you have any trouble to draw a graph, you can answer the question without a graph. If then, your answer should include all the necessary steps, not just the final outcome. For example, shifts in AD or AS, a change in equilibrium GDP or price.

a. How does it change the short-run macroeconomic equilibrium? Briefly explain (and if you can, illustrate it on your graph.). (3pts)

b. How does the economy adjust back to long-run equilibrium? Briefly explain (and if you can, illustrate it on your graph.). (2pts)