Answer to Question #82230 in Finance for Muhammad F Chaudhry

Question #82230
True or false & explain: Under a free market, in which the self-adjusting mechanism operates efficiently, aggregate demand shocks generate real effects in the short-and long-run.
1
Expert's answer
2018-10-22T11:44:09-0400

true

The shock of aggregate demand in the short run has real consequences. If positive, this is an inflationary output gap, and if negative, this is a recessionary output gap (actual GDP is less than potential).

In the free market in the long run deflation will occur. That is, the economy moves to a point of long-run equilibrium.

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