If aggregate demand decreases, and, as a result, real output and employment decline but the price level remains unchanged, it is most likely that
A) the money supply has declined.
B) the price level is inﬂexible downward and a recession has occurred.
C) cost-push inﬂation has occurred.
D) productivity has declined.

Question

Quizplus · Accepted Answer

If aggregate demand decreases and the price level remains unchanged, it implies that there is downward rigidity in the price level. This can happen due to various reasons like contracts, agreements, or social norms. In this situation, real output and employment will decline without any change in the price level, which indicates a recession. There is no indication of a decline in the money supply, cost-push inflation, or productivity in this scenario.

If Aggregate Demand Decreases, And, as a Result, Real Output