Figure 7-3 -Refer to Figure 7-3. Suppose that the economy is in long-run equilibrium at point A. Now suppose the stock market crashes, significantly reducing household wealth. What happens in the short-run? A) Real GDP remains at Y₁ but the price level falls to P₃. B) The quantity of real GDP demanded falls resulting in a movement from point A to point F. C) Real GDP decreases to Y₃ and the price level falls to P₃. D) The economy moves to a short-run equilibrium at point D.

Question

Quizplus · Accepted Answer

A stock market crash reduces household wealth, leading to decreased consumption and aggregate demand. This results in a lower real GDP and a lower price level in the short run.

Figure 7-3 -Refer to Figure 7-3. Suppose That the Economy Is in Economy