Use the following graph to answer the following questions.The graph depicts an economy where aggregate demand and long-run aggregate supply (LRAS)have decreased,with no change in short-run aggregate supply (SRAS).

-The decline in housing prices contributed to the Great Recession,as depicted in the graph,in that it
A) caused real gross domestic product (GD
P)and the price level to increase.
B) caused an increase in oil and gas prices,which led to inflation.
C) caused a decrease in household wealth and created a crisis in the loanable funds market.
D) caused an increase in household wealth and a crisis in the loanable funds market.
E) prevented unemployment from rising above historical averages.

Question

Use the following graph to answer the following questions.The graph depicts an economy where aggregate demand and long-run aggregate supply (LRAS)have decreased,with no change in short-run aggregate supply (SRAS).
 
-The decline in housing prices contributed to the Great Recession,as depicted in the graph,in that it
A) caused real gross domestic product (GD
P)and the price level to increase. 
B) caused an increase in oil and gas prices,which led to inflation. 
C) caused a decrease in household wealth and created a crisis in the loanable funds market. 
D) caused an increase in household wealth and a crisis in the loanable funds market. 
E) prevented unemployment from rising above historical averages.

Quizplus · Accepted Answer

The decline in housing prices caused a decrease in household wealth and created a crisis in the loanable funds market. This led to a decrease in aggregate demand, as shown by the shift from AD1 to AD2 on the graph. As a result, real GDP decreased and the price level decreased as well. There is no evidence to suggest that the decline in housing prices led to an increase in oil and gas prices or prevented unemployment from rising above historical averages. Furthermore, as LRAS did not shift, there was no change in potential output.

Use the Following Graph to Answer the Following Questions