In the short run in the Keynesian model,a sharp decline 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

A decline in oil prices would lead to lower input costs and thus lower production costs, causing an increase in aggregate supply (AS). This shift in AS would cause a lower price level, higher output and a lower real interest rate due to increased demand for investment. Therefore, the correct answer is A (higher level of output, lower real interest rate).

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