If prices are inflexible, then a negative demand shock will lead to
A)a short-run increase in real GDP.
B)a short-run decrease in real GDP.
C)a short-run decrease in prices.
D)no change in real GDP in the short run.

Question

Quizplus · Accepted Answer

If prices are inflexible, a negative demand shock will lead to a short-run decrease in real GDP because the decrease in demand will not be met by a decrease in prices, leading to a decrease in output.

If Prices Are Inflexible, Then a Negative Demand Shock Will