A decrease in aggregate demand will cause a greater decline in real output the
A) less ﬂexible is the economy's price level.
B) more ﬂexible is the economy's price level.
C) steeper is the economy's AS curve.
D) larger is the economy's marginal propensity to save.

Question

Quizplus · Accepted Answer

When the economy's price level is less flexible, prices do not adjust downward easily in response to a decrease in aggregate demand. This inflexibility can lead to a more significant decline in real output because producers are less able to lower prices to stimulate demand, leading to a reduction in production and employment instead.

A Decrease in Aggregate Demand Will Cause a Greater Decline