In the long run, as the economy self-corrects, a decrease in aggregate demand, all other things unchanged, will cause the price level to _____ and potential output to _____.
A) rise; increase
B) fall; decrease
C) rise; remain stable
D) fall; remain stable

Question

Quizplus · Accepted Answer

In the long run, a decrease in aggregate demand will lead to a lower price level as suppliers reduce prices to stimulate demand. Potential output, however, remains stable because it is determined by factors like technology, capital, and labor, which are not affected by short-term fluctuations in demand.

In the Long Run, as the Economy Self-Corrects, a Decrease