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 means that there is a decrease in demand for goods and services but the prices of those goods and services remain the same. As a result, firms will have excess inventory and will need to reduce production, leading to a decrease in real GDP in the short run.

If Prices Are Inﬂexible, Then a Negative Demand Shock Will