Consider an economy starting from a position of full employment.Which one of the following changes does not occur as a result of a decrease in aggregate demand?
A)A recessionary gap arises.
B)Factor prices decrease in the long run, shifting the short- run aggregate supply curve rightward.
C)The level of real GDP decreases in the short run.
D)The long- run aggregate supply curve shifts leftward to create the new long- run equilibrium.
E)The price level decreases.

Question

Quizplus · Accepted Answer

A decrease in aggregate demand will lead to a lower level of real GDP and a lower price level in the short run, which is consistent with options A, C, and E. However, in the long run, factor prices will decrease, causing a rightward shift in the short-run aggregate supply curve, resulting in a new long-run equilibrium with lower prices and the same level of output as before the decrease in aggregate demand. This is consistent with option B. Option D is incorrect because a decrease in aggregate demand would cause the short-run aggregate supply curve to shift leftward, not the long-run aggregate supply curve.

Consider an Economy Starting from a Position of Full Employment