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.Given the effects of the financial and housing crisis on the price level and output and the effects of increased world commodity prices on the price level and output,the aggregate demand and aggregate supply model tells us that
A)output rises and the price level falls.
B)output may rise,fall or stay the same and the price level rises.
C)output falls and the price level may rise,fall or stay the same.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The effects of the financial and housing crisis would cause a decrease in aggregate demand, leading to a decrease in output. At the same time, the increase in world commodity prices would cause an increase in input costs, leading to a decrease in short-run aggregate supply. As a result, output would fall and the price level may rise, fall or stay the same depending on the extent of the shift in aggregate demand and aggregate supply. Hence, option C is the most appropriate choice.