Scenario 14-2
The economy is in long-run equilibrium. Suddenly, due to corporate scandals, a recession experienced by a major trading partner, and the loss of confidence among policymakers, citizens become pessimistic concerning the future. They maintain this level of pessimism for a long time.
-Refer to the Scenario 14-2. In the short-run, which statement is consistent with the aggregate demand and aggregate supply theory?
A) The price level and real GDP both increase.
B) The price level and real GDP both decrease.
C) The price level rises, and real GDP falls
D) The price level falls, and real GDP rises.

Question

Quizplus · Accepted Answer

In the short run, if citizens become pessimistic about the future, they are likely to decrease their spending. This decrease in spending leads to a leftward shift in the aggregate demand curve, which results in both the price level and real GDP decreasing.

Scenario 14-2 The Economy Is in Long-Run Equilibrium. Suddenly, Due to Corporate