If aggregate demand decreases and expectations regarding inflation remain constant

Question

Quizplus · Accepted Answer

If aggregate demand decreases (which means less demand for goods and services by consumers and businesses), it can lead to a decrease in prices (deflation) in the short run. This movement along the short-run Phillips curve (which shows the inverse relationship between unemployment rates and inflation rates in the short run) occurs because lower demand for goods and services reduces businesses' need to pay high wages to attract workers, which in turn lowers costs of production and can result in lower prices. Expectations regarding inflation remaining constant means that there is no change in the anticipated rate of inflation among consumers and businesses.

If Aggregate Demand Decreases and Expectations Regarding Inflation Remain Constant