Given an aggregate supply curve,a decrease in aggregate demand will:
A)increase the real interest rate.
B)increase real GDP.
C)increase the price level.
D)decrease the real exchange rate.
E)decrease real GDP.

Question

Quizplus · Accepted Answer

According to the aggregate supply and demand model, a decrease in aggregate demand will lead to a decrease in both the equilibrium price level and real GDP. As demand decreases, firms will produce less output, resulting in lower real GDP. This will lead to a decrease in incomes and thus, a decrease in consumption and investment spending. As a result, the aggregate demand curve will shift further leftward, leading to a further decrease in real GDP. Thus, the best choice for this question is (E), decrease in real GDP.

Given an Aggregate Supply Curve,a Decrease in Aggregate Demand Will