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 effects of the housing and financial crises
A)raise both inflation and the unemployment rate.
B)raise the inflation rate and reduce the unemployment rate.
C)reduce the inflation rate and raise the unemployment rate.
D)reduce both the inflation rate and the unemployment rate.

Question

Quizplus · Accepted Answer

The housing and financial crises would lead to a decrease in economic activity and output, which would lead to a decrease in demand for goods and services, thereby reducing the inflation rate. In addition, the financial crisis could lead to credit constraints for individuals and businesses, leading to a decrease in investment and hiring, and thus an increase in unemployment rate. Therefore, the short-run effect of the housing and financial crises is a reduction in the inflation rate and an increase in the unemployment rate, making option C the correct choice.