Use the following to answer questions . Exhibit: Short-run Aggregate Supply -(Exhibit: Short-run Aggregate Supply) Suppose that the economy is in long-run equilibrium at point A. Now suppose the stock market crashes, significantly reducing household wealth. What happens in the short-run? A) Real GDP remains at Y₁ but the price level falls to P₃. B) The quantity of real GDP demanded falls resulting in a movement from point A to point F. C) Real GDP decreases to Y₃ and the price level falls to P₃. D) The economy moves to a short-run equilibrium at point D.

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A decrease in household wealth will result in a decrease in consumption and hence a decrease in aggregate demand. This will cause the equilibrium output and price level to decrease, leading to a movement from point A to point C along the short-run aggregate supply curve. Therefore, real GDP decreases to Y₃ and the price level falls to P₃.

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