If the economy's AS curve is upward sloping, a negative shock to aggregate demand will result in
A)an increase in both real GDP and prices.
B)a decrease in both real GDP and prices.
C)a decrease in prices but no change in real GDP.
D)an increase in prices and no change in real GDP.
E)an increase in real GDP and no change in prices.

Question

Quizplus · Accepted Answer

An upward sloping AS curve implies that there is a positive relationship between prices and output. A negative shock to aggregate demand (e.g. a decrease in consumption or investment) will result in a decrease in output and prices. This is because firms will reduce production and lower prices to clear excess inventory. Therefore, both real GDP and prices will decrease in the short run.

If the Economy's AS Curve Is Upward Sloping, a Negative