An unexpected decrease in aggregate demand
A) causes the price level to fall and the unemployment rate to rise.
B) causes the price level to fall and the unemployment rate to fall.
C) causes the price level to rise and the unemployment rate to rise.
D) causes the price level to rise and the unemployment rate to fall.

Question

Quizplus · Accepted Answer

When there is an unexpected decrease in aggregate demand, businesses will reduce their production levels, which leads to a decrease in the demand for labor, resulting in a rise in unemployment rates. As firms lower their output, the prices in the economy will also fall since there is less demand for goods and services. This price deflation and the increasing unemployment rates are characteristic of a recession or economic downturn in the business cycle.

An Unexpected Decrease in Aggregate Demand