If prices and wages are inﬂexible downward, a decrease in aggregate demand will
A) reduce the price level but not real output.
B) increase short-run aggregate supply.
C) decrease short-run aggregate supply.
D) reduce real output but not the price level.

Question

Quizplus · Accepted Answer

When prices and wages are inflexible downward, a decrease in aggregate demand primarily affects real output, leading to lower production and employment, rather than leading to lower prices. This is because firms cannot easily reduce wages or prices in response to decreased demand, so they adjust by reducing the quantity of goods and services produced instead.

If Prices and Wages Are Inﬂexible Downward, a Decrease in Aggregate