In the short run in the Keynesian model,a sharp increase in oil prices would leave the economy with a ________ level of output and a ________ real interest rate.
A)higher; lower
B)lower; higher
C)lower; lower
D)higher; higher

Question

Quizplus · Accepted Answer

According to the Keynesian model, a sharp increase in oil prices would raise production costs for firms across the economy, resulting in a decrease in aggregate supply. This decrease in aggregate supply would lead to a lower level of output in the short run. The decrease in output and inflationary pressures from higher oil prices would lead to a higher real interest rate as the central bank would try to counter the rise in prices by increasing interest rates to dampen demand. Therefore, the correct choice is B.

In the Short Run in the Keynesian Model,a Sharp Increase