In response to a decrease in output, the economy would revert to its original level of prices and output whether the decrease in output was caused by a decrease in aggregate demand or a decrease in short-run aggregate supply.

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The economy's response to a decrease in output depends on the underlying cause. If the decrease is due to a fall in aggregate demand, prices might adjust downward, leading to a potential restoration of output in the long run. However, if the decrease is due to a fall in short-run aggregate supply, prices are likely to increase, and the economy might not revert to its original levels of prices and output without intervention or adjustments in other factors. The adjustment mechanisms and time frames differ significantly between demand-induced changes and supply-induced changes.

In Response to a Decrease in Output, the Economy Would