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).

-In the graph,we see that long-run aggregate supply decreased during the Great Recession.This was due to a decline in housing prices and the subsequent financial crisis.Why did these factors cause long-run aggregate supply to decrease?
A) They caused household wealth and expected income to decline.
B) They caused permanent changes in the market for loanable funds.
C) They caused oil and gas prices to increase,causing inflation.
D) They caused unemployment to remain at normal levels.
E) They caused deflation and an increase in the value of the dollar.

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).
 
-In the graph,we see that long-run aggregate supply decreased during the Great Recession.This was due to a decline in housing prices and the subsequent financial crisis.Why did these factors cause long-run aggregate supply to decrease?
A) They caused household wealth and expected income to decline. 
B) They caused permanent changes in the market for loanable funds. 
C) They caused oil and gas prices to increase,causing inflation. 
D) They caused unemployment to remain at normal levels. 
E) They caused deflation and an increase in the value of the dollar.

Quizplus · Accepted Answer

The decline in housing prices and the financial crisis led to permanent changes in the market for loanable funds, as financial institutions became more risk-averse and lending standards tightened, reducing the availability of credit for investment and growth, which in turn decreased long-run aggregate supply.

Use the Following Graph to Answer the Following Questions