Suppose an economic contraction occurs, due to a shift in aggregate demand.How will prices change, assuming no government intervention?
A) Prices will rise in the short run, and rise even more in the long run.
B) Prices will rise in the short run, and fall back to their original level in the long run.
C) Prices will fall in the short run, and fall even more in the long run.
D) Prices will fall in the short run, and rise back to their original level in the long run.

Question

Suppose an economic contraction occurs, due to a shift in aggregate demand.How will prices change, assuming no government intervention?  
A) Prices will rise in the short run, and rise even more in the long run. 
B) Prices will rise in the short run, and fall back to their original level in the long run. 
C) Prices will fall in the short run, and fall even more in the long run. 
D) Prices will fall in the short run, and rise back to their original level in the long run.

Quizplus · Accepted Answer

When there is a contraction in the economy due to a decrease in aggregate demand, there will be an excess supply of goods and services which causes the prices to fall in the short run. As the market adjusts and businesses decrease their production to match the lower demand, the aggregate supply curve shifts to the left, further pushing down the general price level of goods and services. This will result in a general decline in prices both in the short and long run. Therefore, option C is the most appropriate choice.

Suppose an Economic Contraction Occurs, Due to a Shift in Aggregate