A negative demand shock
A) shifts the AD curve to the right
B) decreases real GDP and increases the price level in the short run
C) is the result of an increase in money demand
D) results in a movement down and to the right along the AD curve
E) decreases both real GDP and the price level in the short run

Question

Quizplus · Accepted Answer

A negative demand shock leads to a decrease in aggregate demand, causing a leftward shift of the AD curve. This leads to a decrease in both real GDP and the price level in the short run, as represented by a movement down and to the left along the AD curve. Option A is incorrect because a leftward shift of the AD curve would mean a decrease in aggregate demand, not an increase. Option B is incorrect because a decrease in real GDP and an increase in the price level are opposite effects and cannot happen simultaneously. Option C is incorrect because an increase in money demand would lead to a decrease in aggregate demand only if the central bank does not increase the money supply accordingly.

A Negative Demand Shock