Assuming an upward-sloping AS curve,if an economy is at full employment and investment spending decreases while all other levels of spending remaining constant,then the price level
A)Increases and output decreases.
B)Decreases and output decreases.
C)Increases and output increases.
D)Decreases and output increases.

Question

Quizplus · Accepted Answer

If investment spending decreases while all other levels of spending remain constant, the aggregate demand decreases. Since the AS curve is upward-sloping, a decrease in aggregate demand leads to a decrease in both output and the price level. At full employment, a decrease in investment spending will cause a recessionary gap, where output is less than potential output. Therefore, the price level will decrease and output will decrease.

Assuming an Upward-Sloping AS Curve,if an Economy Is at Full