In the short run in the Keynesian model,an oil price shock 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

An oil price shock would lead to an increase in the cost of production for firms, which, given nominal wages, results in a decrease in profits and output. In the short run, nominal wages are sticky, resulting in a decrease in real wages and thus a decrease in consumption spending. Additionally, the decrease in output would also result in a decrease in the demand for money, which would cause the real interest rate to rise. Therefore, the correct answer is B) lower level of output and a higher real interest rate.

In the Short Run in the Keynesian Model,an Oil Price