Suppose aggregate demand in the economy sharply declines. Mainstream economists say that the price level (at least for a time) will _______ and real output will _________.
A) decrease; remain constant
B) increase; remain constant
C) remain constant; decrease
D) remain constant; increase

Question

Quizplus · Accepted Answer

Mainstream economists believe that in the short run, prices are sticky, meaning they do not adjust immediately to changes in demand. Therefore, a sharp decline in aggregate demand will lead to a decrease in real output while the price level remains constant.

Suppose Aggregate Demand in the Economy Sharply Declines