Within the AD/AS model, if an unanticipated reduction in aggregate demand results in less than the full-employment rate of output,
A) the natural rate of unemployment will increase.
B) long-run aggregate supply will increase.
C) lower resource prices and declining interest rates will direct the economy back to full employment.
D) higher resource prices and rising interest rates will direct the economy back to full employment.

Question

Quizplus · Accepted Answer

If an unanticipated reduction in aggregate demand results in less than the full-employment rate of output, it will create a recessionary gap. In order to return to full employment, resource prices and interest rates will decrease, which will shift the aggregate demand curve to the right. This will restore equilibrium output and employment levels close to full employment. The decrease in resource prices and interest rates will occur because there will be downward pressure on them due to decreased demand for resources and a surplus of loanable funds, respectively.

Within the AD/AS Model, If an Unanticipated Reduction in Aggregate