Question

If aggregate demand decreases and short run aggregate supply remains the same then what will happen to price levels? Group of answer choices

A) Stay the same

B) Increase

C) Decrease

D) Remain constant

2) If short run aggregate supply decreases and aggregate demand stays the same then what happens to price levels?

Group of answer choices

A) Increase

B) Decrease

C) Stay the same

D) Remain constant

3) Which of the following best describes the economy during time of very high unemployment?

Group of answer choices

A)The economy is operating to the right of the Potential GDP curve

B) The economy is operating to the left of the Potential GDP curve

C) The economy is operating on the intersection of the Potential GDP curve

D) The aggregate supply curve is downward sloping

Answer 1

Answer-1. Correct option is 'C'

If aggregate demand decreases and short run aggregate supply remains the same then price level will decrease. Because when the aggregate demand decreases,the total quantity of goods and services demanded at given price level falls and the AD curve will shift left, as a result the price level will fall. If aggregate supply remains the same, due to decrease in aggregate demand the equilibrium price level will fall.

Answer-2.Correct option is 'A'

If short run aggregate supply decreases and aggregate demand stays the same then price level will increase. Because when the aggregate supply decreases, the total quantity of goods and services supplied at given price level falls and the AS curve will shift left, as a result the price level will rise. If aggregate demand remains the same, due to decrease in aggregate supply the equilibrium price level will rise.

Answer-3. Correct option is 'B'

During time of very high unemployment the economy is operating to the left of the Potential GDP curve. High unemployment indicates, the economy is operating below full capacity and is inefficient, this will lead to a lower output and income. The unemployed are also unable to purchase, as many goods, so will contribute to lower spending and lower output. A rise in unemployment can cause a negative multiplier effect. Potential GDP is the level of production of goods and services that an economy is capable of it's worker is fully employed and and its capital stock is fully utilised. During time of very high unemployment actual GDP or the economy operates less than the potential GDP.