Assume that the AD curve is held constant and short-run aggregate supply decreases.The result is a(n):
A)increase in both equilibrium real GDP and the price level.
B)decrease in equilibrium real GDP and an increase in the price level.
C)decrease in both equilibrium real GDP and the price level.
D)decrease in equilibrium real GDP, while the price level remains fixed.
E)increase in the price level, while equilibrium real GDP remains fixed.

Question

Quizplus · Accepted Answer

A decrease in short-run aggregate supply shifts the SAS curve to the left, which results in a lower equilibrium level of real GDP and a higher price level. This is illustrated by a movement from point A to point B on the AD-AS model. Since the AD curve is held constant, the level of output is determined by the intersection of the new SAS curve and the existing AD curve. Therefore, the equilibrium level of real GDP decreases, while the price level increases.

Assume That the AD Curve Is Held Constant and Short-Run