If the price level falls as real GDP decreases, the multiplier effects of any given change in aggregate expenditures are smaller than they would be if the price level remained constant.

Question

Quizplus · Accepted Answer

When the price level falls as real GDP decreases, it is an indication of deflation, which means the prices of goods and services have decreased. In this scenario, the purchasing power of consumers increases, and the demand for goods and services rises. As a result, the multiplier effect is smaller than it would be if the price level remained constant because the increase in demand leads to a corresponding shift in the aggregate supply curve to the right, which reduces the size of the multiplier. Therefore, the statement is true.

If the Price Level Falls as Real GDP Decreases, the Multiplier