Beginning from a position of long-run equilibrium at the full-employment level of real GDP, the economy's short-run response to a decrease in the aggregate demand curve would be a:
A) movement upward along the short-run aggregate supply curve.
B) movement upward along the long-run aggregate supply curve.
C) downward shift in the short-run aggregate supply curve.
D) movement downward along the short-run aggregate supply curve.

Question

Quizplus · Accepted Answer

A decrease in aggregate demand results in less demand for goods and services in the economy, which creates a surplus of goods and a downward pressure on prices. In the short run, firms may reduce production and employment, but prices are slow to adjust. Therefore, there is a movement downward along the short-run aggregate supply curve until the new equilibrium point is reached where both output and prices are lower than before.

Beginning from a Position of Long-Run Equilibrium at the Full-Employment