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

Question

Quizplus · Accepted Answer

A decrease in aggregate demand means less demand for goods, which leads to lower output. Since there is full employment, there are no extra workers to hire, so output cannot increase. Lower output means lower demand for factors of production, which leads to lower prices. Therefore, the price level and level of output both decrease in the short run.

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