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:

Consumption

Domestic consumption of various goods and services.

Interest Rate

The annual percentage yield that is charged as interest for borrowing money or paid to investors as a return on investment.

Income

Money received on a regular basis from work, investments, business, etc., used to fund living expenses and savings.

Utility Function

A mathematical representation of how consumers rank different bundles of goods based on the level of satisfaction (utility) they provide.