You have just read that Australia has suffered a drought, destroying its wheat crop for this year. The effect of this adverse supply shock on Australia would probably be
A) an increase in prices and an increase in real interest rates.
B) an increase in prices, an increase in nominal interest rates, but a decrease in real interest rates.
C) a decrease in prices and an decrease in real interest rates.
D) a decrease in prices, a decrease in nominal interest rates, but an increase in real interest rates.

Question

Quizplus · Accepted Answer

An adverse supply shock, such as a drought, will lead to a decrease in the supply of wheat, which will cause an increase in prices. The increase in prices will lead to an increase in nominal interest rates, but a decrease in real interest rates.

You Have Just Read That Australia Has Suffered a Drought