How would a stock market crash affect aggregate demand?

Question

If there were to be a stock market crash, how would it affect aggregate demand?

And what if there had been equilibrium employment (i.e. full employment) what could a government do or what policies could it introduce to restore full employment?

Answer 1

recession of course. decrease int rates and a set of monetary adjustments to keep position blanced off course public exp could hav een here but more reponsive signalling needs to be made eg. tx holidays credit rating, yet publc exp sees t be involved in all this , gov needs to intervene but tat could  suprt insteadof exclusion.

Answer 2

if the stock market crashed for a long time, ie sparked by a financial crisis, then yes, we would most probably go into recession. I think the definition of recession differs from country to country. But I think the general definition is if the country's quarterly GDP is of a negative value for two consecutive periods. so if the country does go into recession then yes it will affect aggregate demand.

Recession means the slowing down of the economy, whereby the demand for goods are relatively lesser, hence the aggregate demand for the country would decrease. Since aggregate demand is decreasing, on a firm basis, sales has dropped hence they would have to reduce cost to achieve the same level of profit. One way is to retrench workers that are redundant in the firm. hence the unemployment.

When recession happens, the government would conduct an expansionary fiscal policy whereby there will reduce tax rates and/or increase government spending. When the government increases government spending, the government is developing more projects in the country, hence this creates jobs for the people (and for those recently unemployed).