2.. If the economy is operating in the short run AS curve and aggregate demand falls(...

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2.. If the economy is operating in the short run AS curve and aggregate demand falls(...

2.. If the economy is operating in the short run AS curve and aggregate demand falls( decrease) , what is likely to happen to real GDP, Price level, Unemployment and why? Would you suggest the economy will face a recessionary gap or inflationary gap?

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Answer 1

Answer #1

A decrease in Aggregate Demand leads to leftwards shift of AD curve. Given no change in aggregate supply, this leads to fall in real GDP and fall in price level.

When real GDP falls, unemployment rate rises as less labor is required to produce fallen quantity.

This leads to recessionary gap as the real output is less than potential output.

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Answer 2

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