If aggregate demand decreases and neither short- run nor long- run aggregate supply changes, then
A) there will be an inflationary gap.
B) there will be a recessionary gap.
C) in the long run, the long- run aggregate supply will decrease.
D) the price level will increase in the short- run and decrease in the long- run.

Question

Quizplus · Accepted Answer

If aggregate demand decreases and neither short-run nor long-run aggregate supply changes, then the equilibrium output level in the economy will decrease, creating a recessionary gap. This means that the economy is producing below its potential output level and unemployment will rise. There will be downward pressure on prices, which will eventually lead to a decrease in the price level in the long run. However, there will be no change in the long-run aggregate supply as the factors of production remain constant.

If Aggregate Demand Decreases and Neither Short- Run nor Long-