Starting from a situation of full employment, a decrease in aggregate demand ________ the price level, leading to ________.
A) raises; an inflationary gap
B) lowers; a recessionary gap
C) raises; a recessionary gap
D) lowers; an inflationary gap
E) does not change; a decrease in potential GDP

Question

Quizplus · Accepted Answer

A decrease in aggregate demand will lead to a lower price level and a recessionary gap as a result of lower output and employment levels. Inflationary gaps occur when the economy is at or above full employment, so this option is not applicable. The price level and potential GDP are not necessarily related, so option E is also not correct.

Starting from a Situation of Full Employment, a Decrease in Aggregate