How do prices change due to an economic contraction that is caused by a shift in aggregate demand?
A) They rise in the short run and rise even more in the long run.
B) They rise in the short run and fall back to their original level in the long run.
C) They fall in the short run and fall even more in the long run.
D) They fall in the short run and rise back to their original level in the long run.

Question

Quizplus · Accepted Answer

If there is an economic contraction caused by a shift in aggregate demand, there will be a lower demand for goods and services. This will cause businesses to lower their prices in order to stimulate demand. In the short run, prices will fall, but as businesses adjust to the lower demand, they may cut their costs by reducing their production. This will lead to lower incomes and higher unemployment, causing demand to fall even more. Ultimately, prices will fall even further in the long run.

How Do Prices Change Due to an Economic Contraction That