The U.S. economy is at full employment when the following events occur:

1. A deep recession hits the world economy.

2. The world oil price rises by a large amount.

3. U.S. businesses expect future profits to fall.

Explain the combined effect of these events on the U.S. real GDP and price level.

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Part 1

A. All three events decrease real GDP. Events 1 and 3 raise the price level and Event 2 lowers the price level, so we can't tell whether the price level rises or falls.

B. All three events decrease real GDP. Events 1 and 3 lower the price level and Event 2 raises the price level, so we can't tell whether the price level rises or falls.

C. Events 1 and 3 decrease real GDP and Event 2 increases real GDP, so we can't tell whether real GDP increases or decreases. Events 1 and 3 lower the price level and Event 2 raises the price level, so we can't tell whether the price level rises or falls.

D. Events 1 and 3 decrease real GDP and Event 2 increases real GDP, so we can't tell whether real GDP increases or decreases. All three events lower the price level.

E. All three events increase real GDP. Events 1 and 3 raise the price level and Event 2 lowers the price level, so we can't tell whether the price level rises or falls.