A decrease in aggregate demand is harmful in the short run because ________ but not in the long run because ________.
A) real wealth rises; real wealth falls
B) wages increase; wages decrease
C) the price level rises; output falls
D) unemployment rises; the price level falls
E) the price level falls; the unemployment rate rises

Question

Quizplus · Accepted Answer

In the short run, a decrease in aggregate demand leads to a decrease in output and employment, as firms reduce production and lay off workers to match the lower level of demand. This causes unemployment to rise. However, in the long run, wages and prices can adjust, which allows the economy to return to its natural level of output, and the negative effects of the initial decrease in aggregate demand will dissipate. The price level may fall as a result of lower aggregate demand, which would help to restore equilibrium in the long run, but this is not harmful.

A Decrease in Aggregate Demand Is Harmful in the Short