Which of the following will most likely occur in the short run when the long-run equilibrium of an economy is disturbed by an unanticipated decrease in aggregate demand?
A) a decrease in output and a higher price level
B) an increase in output and a higher price level
C) a decrease in output and a lower price level
D) an increase in output while prices remain unchanged

Question

Quizplus · Accepted Answer

In the short run, a decrease in aggregate demand (AD) will lead to a decrease in output and therefore a decrease in employment. This will create a surplus of goods and services, causing firms to lower their prices in order to sell their products. As firms decrease their prices, the price level will fall. Therefore, in the short run, we would see a decrease in output (and employment) along with a decrease in the price level. This is known as a recessionary gap.

Which of the Following Will Most Likely Occur in the Short