In the short run,any fall in EP /P,regardless of its causes,will cause
A)an upward shift in the aggregate demand function and an expansion of output.
B)an upward shift in the aggregate demand function and a reduction in output.
C)a downward shift in the aggregate demand function and an expansion of output.
D)an downward shift in the aggregate demand function and a reduction in output.
E)an upward shift in the aggregate demand function but leaves output intact.

Question

In the short run,any fall in EP  /P,regardless of its causes,will cause
A)an upward shift in the aggregate demand function and an expansion of output. 
B)an upward shift in the aggregate demand function and a reduction in output. 
C)a downward shift in the aggregate demand function and an expansion of output. 
D)an downward shift in the aggregate demand function and a reduction in output. 
E)an upward shift in the aggregate demand function but leaves output intact.

Quizplus · Accepted Answer

Any fall in EP/P means that the price level has decreased. As a result, households will feel wealthier and will demand more goods and services. This will cause an upward shift in the aggregate demand function. However, in the short run, firms may not be able to respond with an equal increase in output, leading to a reduction in output. Therefore, the best choice is D, which states that a fall in EP/P will cause a downward shift in the aggregate demand function and a reduction in output.

In the Short Run,any Fall in EP /P,regardless of Its