Suppose workers become pessimistic about their future employment, which causes them to save more and spend less. If the economy is on the intermediate range of the aggregate supply curve, then:
A) both real GDP and the price level will fall.
B) real GDP will fall and the price level will rise.
C) real GDP will rise and the price level will fall.
D) both real GDP and the price level will rise.

Question

Quizplus · Accepted Answer

When workers become pessimistic about their future employment and start saving more and spending less, it causes a decrease in aggregate demand, leading to lower real GDP and lower prices. This corresponds to a leftward shift of the aggregate demand curve. Since the economy is on the intermediate range of the aggregate supply curve, the decrease in aggregate demand will cause a reduction in both real GDP and the price level. Therefore, the correct answer is A.

Suppose Workers Become Pessimistic About Their Future Employment, Which Causes