The Economy in 2008
In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy.
-Refer to The Economy in 2008.In the short run the increased prices of world commodities
A)raised both the price level and output.
B)raised the price level and reduced output.
C)reduced the price level and raised output.
D)reduced both the price level and output.

Question

Quizplus · Accepted Answer

The increased prices of world commodities in 2008 would have raised the cost of production for many firms, leading to reduced output. Furthermore, higher prices for goods would have reduced the purchasing power of consumers, leading to a fall in demand and a reduction in overall output. At the same time, higher prices would have raised the price level as measured by inflation. Therefore, both the price level and output were affected, but in opposite directions.