Suppose There Was a Sharp Reduction in Stock Prices and a Sharp

question 66

Multiple Choice

Suppose there was a sharp reduction in stock prices and a sharp increase in the world price of crude oil. Within the framework of the AD/AS model, how would these two changes influence the U.S. economy?

• A) The lower stock prices would increase SRAS, and the higher crude oil prices would reduce AD; as a result, there would be downward pressure on the general level of prices.
• B) The lower stock prices would reduce SRAS, and the higher crude oil prices would increase AD; as a result, there would be upward pressure on the general level of prices.
• C) The lower stock prices would increase AD, and the higher crude oil prices would increase SRAS; as a result, output would tend to increase.
• D) The lower stock prices would reduce AD, and the higher crude oil prices would reduce SRAS; as a result, output would tend to decline.

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Definitions:

Deferred Compensation

A portion of an employee's income that is paid out at a later date, often used as a retirement benefit.

Grant Date

The specific date on which stock options or grants are awarded to an employee under a stock option plan.

Fair Value Method

The Fair Value Method is an accounting approach that measures and reports assets and liabilities at their fair value or the price they would receive in a current market transaction.