What happens in an economy when short-run aggregate supply decreases?
A) The price level rises, output rises, and an expansion occurs.
B) The price level rises, output falls, and a recession occurs.
C) The price level falls, output rises, and an expansion occurs.
D) The price level falls, output falls, and a recession occurs.

Question

Quizplus · Accepted Answer

When short-run aggregate supply decreases, it typically leads to higher prices and lower output, as producers are willing or able to supply less at any given price level. This scenario often results in a recessionary gap, where actual output is less than potential output.

What Happens in an Economy When Short-Run Aggregate Supply Decreases