If an unanticipated decrease in aggregate demand results in an output below the economy's long-run capacity, long-run equilibrium will eventually be restored by
A) an increase in the rate of inflation.
B) lower resource prices and lower real interest rates.
C) higher resource prices and higher real interest rates.
D) a decrease in the natural rate of unemployment.

Question

Quizplus · Accepted Answer

An unanticipated decrease in aggregate demand will result in a recessionary gap, which is a situation where output is below the economy's long-run capacity. In the long-run, this will lead to lower resource prices and lower real interest rates. As resource prices fall, the cost of production will decrease, leading to an increase in the short-run aggregate supply (SRAS) curve. This will cause the economy to move up along the aggregate demand (AD) curve, eventually restoring long-run equilibrium at the full-employment level of output. Additionally, lower real interest rates will stimulate spending and investment, further boosting aggregate demand. The other options are incorrect as they do not lead to the restoration of long-run equilibrium.

If an Unanticipated Decrease in Aggregate Demand Results in an Output