If the economy's AS curve is very steep and there is a negative aggregate demand shock, the result will be
A)an increase in both the price level and national income.
B)a decrease in the price level and an increase in national income.
C)a decrease in the price level with almost no change in national income.
D)no change in either price level or output.
E)an increase in the price level and a decrease in national income.

Question

Quizplus · Accepted Answer

If the economy's AS curve is very steep, it indicates that the economy's production is close to its maximum potential even at a relatively low price level. In the case of a negative aggregate demand shock, the equilibrium output level will decrease, leading to a decrease in national income. However, the steepness of the AS curve implies that the decrease in output level is associated with only a small decrease in the price level, as the economy's production capacity is still close to its maximum potential. Hence, the result will be a decreased price level with almost no change in national income.

If the Economy's AS Curve Is Very Steep and There