A deep recession hits the world economy,and real GDP in the rest of the world decreases.In Australia,
A)aggregate supply and aggregate demand both increase,and the price level rises.
B)aggregate supply and aggregate demand both decrease,and the price level rises.
C)aggregate demand decreases while aggregate supply does not change,and the price level falls.
D)aggregate supply decreases while aggregate demand does not change,and the price level rises.
E)aggregate supply increases and aggregate demand decreases,so the effect on the price level is uncertain.

Question

Quizplus · Accepted Answer

When a deep recession hits the world economy, there is a decrease in real GDP in the rest of the world, which in turn reduces demand for Australian exports. This results in a decrease in aggregate demand in Australia. However, since the recession affects the world economy, there is also likely to be a decrease in demand for Australia's imports, which would counteract the decrease in aggregate demand to some extent. At the same time, there is likely to be excess capacity in the Australian economy due to the recession, which would keep aggregate supply from decreasing. Thus, the combination of a decrease in aggregate demand and no change in aggregate supply would result in a fall in price level in Australia.

A Deep Recession Hits the World Economy,and Real GDP in the Rest