If prices and wages are flexible, a decrease in aggregate demand will in the long run cause only a(n):
A) Decrease in the price level
B) Increase in the price level
C) Increase in the unemployment rate
D) Decrease in real output

Question

Quizplus · Accepted Answer

In the long run, prices and wages are flexible, meaning that they can adjust to changes in demand and supply. If aggregate demand decreases, there will be a decrease in demand for goods and services, which will cause prices to fall. This decrease in prices will eventually lead to an increase in the quantity demanded, leading to a new equilibrium with lower prices and the same level of real output. Therefore, the only long-run effect of a decrease in aggregate demand is a decrease in the price level.

If Prices and Wages Are Flexible, a Decrease in Aggregate