A strong negative wealth effect from, say, a precipitous drop in the stock market could cause a recession even though productivity is surging if aggregate demand shifts a. left, and aggregate supply shifts left. b. right, and aggregate supply shifts right. c. left, while aggregate supply shifts right. d. right, while aggregate supply shifts left.

The correct answer is C)

A strong negative wealth effect from, say, a precipitous drop in the stock market could cause a recession even though productivity is surging if aggregate demand shifts left, and aggregate supply shifts right

Explanation:

When aggregate demand (or AD for short) shifts left, it is because the components of aggregate demand such as consumption spending, investment spending, government spending, and spending on exports minus imports are falling.

When aggregate supply (or AS) shifts right, it may be due to the increase in price of key inputs.

When AD goes left and AS goes right, it could be a signal that there is the divestment has been channelled in to the real sector thus creating a surge in the demand for input.

However because government is not spending, this can translate to a recessed economy.

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