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 (the price level) will cause a decrease in aggregate expenditure and a decrease in the aggregate demand function. This will lead to a shift downwards in the aggregate demand curve and a reduction in output in the short-run, depicted by a leftward shift in the short-run aggregate supply curve. Therefore, the correct answer is D.

In the Short-Run, Any Fall in EP /P, Regardless