Figure 8-1
-According to Figure 8-1,a decrease in aggregate demand between real GDP levels Q₁ and Q₀
A)would most likely result in some inflation.
B)would not increase output since the economy is already working at full capacity.
C)would have no effect on the price level.
D)would cause price levels to fall.

Question

Figure 8-1 
-According to Figure 8-1,a decrease in aggregate demand between real GDP levels Q₁ and Q₀
A)would most likely result in some inflation. 
B)would not increase output since the economy is already working at full capacity. 
C)would have no effect on the price level. 
D)would cause price levels to fall.

Quizplus · Accepted Answer

According to Figure 8-1, a decrease in aggregate demand between real GDP levels Q₁ and Q₀ would cause the price levels to fall. This is indicated by the downward sloping line of aggregate demand intersecting with the upward sloping line of short-run aggregate supply at a lower price level (P₀) than the initial price level (P₁). As a result, businesses may lower prices to stimulate demand and output may decrease due to reduced profits, resulting in a decrease in real GDP.

Figure 8-1 -According to Figure 8-1,a Decrease in Aggregate Demand Between Real