Suppose housing values fall during a recession. In the short run,
A) the price level will fall as we move down the aggregate demand curve.
B) the price level will fall as we move down the short-run aggregate supply curve.
C) short-run aggregate supply will decrease and the price level will fall.
D) short-run aggregate supply will increase because wages will fall.
E) aggregate demand will increase because the demand for houses will increase.

Question

Quizplus · Accepted Answer

A fall in housing values will lead to a decrease in wealth, and therefore a decrease in consumption spending and investment spending. This shift in aggregate demand will cause a movement down the short-run aggregate supply curve, resulting in lower prices in the short run.

Suppose Housing Values Fall During a Recession