Financial Crisis: Suppose that banks are less able to raise funds and so lend le

Question

Financial Crisis:

Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time.

Refer to Financial Crisis. In the long run, if the Fed does not respond, the change in price expectations created by the crisis shifts

A. short-run aggregate supply right. B. aggregate demand right. C. aggregate demand left. D. short-run aggregate supply left.

Explanation / Answer

In the long run, if the Fed does not respond, the change in price expectations created by the crisis shifts short-run aggregate supply right. The aggregate supply curve on short-run shows shift towards right which means that the the GSP decreases along with the decrease in price of the products but the production of output is high. It shows loss to the company producing more but selling off less amount of products. The output is shows to be high at rate of production and affected by low supply of the products in the market whereby, the curve shifts to right sie which is affected by wages of labour, cost of raw materials, tax incurred on services, etc.

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