Assume an economy that is currently at the full-employment level of output.If aggregate demand decreases, what should we expect in the median run?
A)a decrease in potential GDP and the price level
B)an increase in unemployment and the price level
C)a decrease in unemployment and the price level
D)an increase in unemployment and a decrease in the price level
E)a decrease in potential GDP and an increase in unemployment

Question

Quizplus · Accepted Answer

If aggregate demand decreases, the economy will experience a decrease in output and aggregate supply. This will lead to a decrease in the price level and an increase in unemployment in the short run. In the long run, wages and prices will adjust, leading to a decrease in the price level and potential GDP, and an increase in unemployment. Therefore, the best choice is D.

Assume an Economy That Is Currently at the Full-Employment Level