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CFA Level 1 Question of the Week - Economics

In 2007, housing prices dropped almost overnight as a result of what some economists referred to as a correction from prices that formed in a market bubble. Financial assets also dropped in value. The subsequent changes in GDP could be best explained as:
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CFA Level 1 Question of the Week - Economics 10 votes

A. a movement along the aggregate demand (AD) curve to a lower price level and less output.
50% 5 votes
B. a shift in the aggregate supply (AS) curve, such that supply decreased at all price levels.
0% 0 votes
C. a leftward shift in the aggregate demand (AD) curve as a consequence of reduced wealth.
50% 5 votes

Comments

  • Matt_AnalystPrepMatt_AnalystPrep MontrealPosts: 141 Associate

    The answer is C.

    Investors who already owned homes saw the equity in their homes and their retirement investment portfolios shrink. Therefore, simply put, they were less willing to make purchases.  This evaporation of consumption spending was a driver of the recession that followed. 

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