At low levels of Real GDP,what is the result of a decrease in aggregate demand?
A)The price level will fall a lot and Real GDP will fall a little.
B)The price level will fall a little and Real GDP will fall a lot.
C)The price level will fall a little and Real GDP will rise a lot.
D)The price level will fall a little and Real GDP will rise a little.
E)Both the price level and Real GDP will fall about the same amount.

Question

Quizplus · Accepted Answer

At low levels of Real GDP, the economy is operating below its potential, and so there is a lot of spare capacity. As a result, a decrease in aggregate demand will lead to a large fall in Real GDP as firms cut back on production and lay off workers. The fall in demand will also put downward pressure on prices, but the impact will likely be small given the size of the output gap. Therefore, the price level will fall a little and Real GDP will fall a lot.

At Low Levels of Real GDP,what Is the Result of a Decrease