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. What happens to the price level and real GDP in the short run? a. both the price level and real GDP fall b. the price level falls and real GDP rises c. both the price level and real GDP rise d. the price level rises and real GDP falls

Answer 1

Answer:

A) both the price level and real GDP fall

Explanation:

During recessions both the inflation rate (change in general price level) and the real GDP will either stop growing or reduce their growth rate.

Recessions are usually the result of financial crisis, especially the last great recession of 2008 through 2010. Once private consumption starts to fall, the whole economy will slow down dramatically or also fall. Private consumption represents almost 70% of the GDP, so it is by far the largest and most important economic factor.