Suppose there was a sharp reduction in stock prices and a sharp increase in the world price of crude oil. Within the framework of the AD/AS model, how would these two changes influence the U.S. economy?
A) The lower stock prices would increase SRAS, and the higher crude oil prices would reduce AD; as a result, there would be downward pressure on the general level of prices.
B) The lower stock prices would reduce SRAS, and the higher crude oil prices would increase AD; as a result, there would be upward pressure on the general level of prices.
C) The lower stock prices would increase AD, and the higher crude oil prices would increase SRAS; as a result, output would tend to increase.
D) The lower stock prices would reduce AD, and the higher crude oil prices would reduce SRAS; as a result, output would tend to decline.

Question

Quizplus · Accepted Answer

A sharp reduction in stock prices would lead to a decrease in household wealth and confidence, thereby reducing consumption spending and AD. A sharp increase in the world price of crude oil would increase production costs, leading to a reduction in SRAS. Therefore, both factors would reduce AD and SRAS, leading to a decline in output. This is consistent with option D.

Suppose There Was a Sharp Reduction in Stock Prices and a Sharp