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November 30, 2022

Suppose that the economy enters into a major recession brought on by a financial crisis that stems from a real estate bubble bursting and the ensuing fall in real estate (asset) prices.

Suppose that the economy enters into a major recession brought on by a financial crisis that stems from a real estate bubble bursting and the ensuing fall in real estate (asset) prices. In two paragraphs and using graphical analysis from the graph provided below, explain how the Classical view of the return to long run potential output can be complicated by feedback effects in the AS/AD model. Be sure to explain what is causing these feedback effects.

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