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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. In the short-run,
A) the nominal wage rate falls.
B) unemployment is above its natural level.
C) there will be pressure on prices to rise.
D) the short-run aggregate supply curve shifts to the left as firms cut production.

Question

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. In the short-run,
A) the nominal wage rate falls. 
B) unemployment is above its natural level. 
C) there will be pressure on prices to rise. 
D) the short-run aggregate supply curve shifts to the left as firms cut production.

Quizplus · Accepted Answer

In the short-run, a stock market crash reduces household wealth, leading to decreased consumption and aggregate demand. This results in higher unemployment above its natural level as firms reduce output in response to lower demand.

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