Suppose the housing market crashes. As a result, the real wealth of US consumers

Question

Suppose the housing market crashes. As a result, the real wealth of US consumers declines significantly. Use the AD/AS model to determine what happens to real GDP and the price level, in the short run, as a result. Assume an upward sloping AS curve, and assume there is no impact on the aggregate supply curve. a. Real GDP increases and the inflation pressure increases. b. Real GDP decreases and the inflation pressure decreases. c. Real GDP increases, but the inflation pressure decreases. d. Real GDP decreases, but the inflation pressure increases. e. Real GDP may increase or decrease, but the inflation pressure unambiguously increases. Suppose the housing market crashes. As a result, the real wealth of US consumers declines significantly. Use the AD/AS model to determine what happens to real GDP and the price level, in the short run, as a result. Assume an upward sloping AS curve, and assume there is no impact on the aggregate supply curve. a. Real GDP increases and the inflation pressure increases. b. Real GDP decreases and the inflation pressure decreases. c. Real GDP increases, but the inflation pressure decreases. d. Real GDP decreases, but the inflation pressure increases. e. Real GDP may increase or decrease, but the inflation pressure unambiguously increases. Suppose the housing market crashes. As a result, the real wealth of US consumers declines significantly. Use the AD/AS model to determine what happens to real GDP and the price level, in the short run, as a result. Assume an upward sloping AS curve, and assume there is no impact on the aggregate supply curve. a. Real GDP increases and the inflation pressure increases. b. Real GDP decreases and the inflation pressure decreases. c. Real GDP increases, but the inflation pressure decreases. d. Real GDP decreases, but the inflation pressure increases. e. Real GDP may increase or decrease, but the inflation pressure unambiguously increases.

Explanation / Answer

Correct option is (b).

Lower real wealth will decrease consumption expenditure, decreasing aggregate demand and shifting AD curve toward left. As a result, both real GDP and price level (inflation) decreases.

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