Question: The chapter suggests that the economy, like the human body, has natural restorative powers. a. Illustrate the short-run effect of a fall in aggregate demand

The chapter suggests that the economy, like the human body, has “natural restorative powers.”

a. Illustrate the short-run effect of a fall in aggregate demand using an aggregate-demand/ aggregate-supply diagram. What happens to total output, income, and employment?

b. If the government does not use stabilization policy, what happens to the economy over time? Illustrate this adjustment on your diagram. Does it generally occur in a matter of months or a matter of years?

c. Do you think the “natural restorative powers” of the economy mean that policymakers should be passive in response to the business cycle?

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