How does an economic contraction that is caused by a shift in aggregate demand remedy itself over time?
A) The expected price level rises, shifting aggregate demand to the right.
B) The expected price level rises, shifting aggregate demand to the left.
C) The expected price level falls, shifting aggregate supply to the right.
D) The expected price level falls, shifting aggregate supply to the left.

Question

How does an economic contraction that is caused by a shift in aggregate demand remedy itself over time?  
A) The expected price level rises, shifting aggregate demand to the right. 
B) The expected price level rises, shifting aggregate demand to the left. 
C) The expected price level falls, shifting aggregate supply to the right. 
D) The expected price level falls, shifting aggregate supply to the left.

Quizplus · Accepted Answer

An economic contraction caused by a shift in aggregate demand leads to a decrease in output and higher unemployment. As a result, companies reduce their prices in order to sell their stock, lowering the expected price level. This causes the aggregate supply to shift to the right, leading to a rise in output and a fall in unemployment. Over time, the economy returns to its long-term equilibrium position.

How Does an Economic Contraction That Is Caused by a Shift