Suppose the economy is initially in a long-run macroeconomic equilibrium.A shock then hits the economy and we observe that the unemployment rate increases and the price level decreases.We can conclude that ________ has decreased and there is now a(n)________ gap.
A)aggregate supply; inflationary
B)aggregate demand; recessionary
C)aggregate supply; recessionary
D)aggregate demand; inflationary

Question

Quizplus · Accepted Answer

When the unemployment rate increases and the price level decreases, it indicates that aggregate demand has decreased, leading to a recessionary gap. This is because a decrease in aggregate demand results in lower overall spending, which reduces production and increases unemployment, while also putting downward pressure on prices.

Suppose the Economy Is Initially in a Long-Run Macroeconomic Equilibrium