If an economy is initially at a state of long-run equilibrium, the short-run effect(s) from a decrease in aggregate demand will include:
A)an expansionary gap.
B)a higher rate of inflation.
C)a higher level of potential output.
D)a recessionary gap.

Question

Quizplus · Accepted Answer

A decrease in aggregate demand will cause a recessionary gap in the short run when the economy moves away from the long-run equilibrium point. This means that output and employment levels will be lower than their potential levels, resulting in a recession.

If an Economy Is Initially at a State of Long-Run