If the economy is in equilibrium at full employment, a decrease in aggregate demand will:
A) increase both the price level and the level of output in the long run.
B) decrease both the price level and the level of output in the long run.
C) decrease the price level and leave the level of output unchanged in the long run.
D) increase the price level and leave the level of output unchanged in the long run.

Question

Quizplus · Accepted Answer

In the long run, the economy tends to return to full employment output due to flexible prices and wages. A decrease in aggregate demand will lower the price level, but output will eventually return to its full employment level.

If the Economy Is in Equilibrium at Full Employment, a Decrease