Sia
Question
Statistics
Posted 10 months ago
What will happen to real GDP, unemployment, and the price level if there is a negative shock to aggregate demand?
Choose 1 answer:
(A) real GDP decreases, unemployment increases, and the price level decreases
(B) real GDP increases, unemployment decreases, and the price level increases
(c) real GDP increases, unemployment decreases, and the price level decreases
(D) real GDP increases, unemployment increases, and the price level decreases
(E) real GDP decreases, unemployment decreases, and the price level increases
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Answer from Sia
Posted 10 months ago
Solution by Steps
step 1
Understand the effects of a negative shock to aggregate demand on the SRAS curve: A negative shock to aggregate demand results in a leftward shift of the aggregate demand curve
step 2
Analyze the impact on real GDP: When aggregate demand decreases, it leads to a lower quantity of goods and services being demanded at every price level, which decreases real GDP
step 3
Analyze the impact on unemployment: According to Okun's Law, when real GDP decreases, unemployment increases because fewer goods and services are being produced, which requires less labor
step 4
Analyze the impact on the price level: A decrease in aggregate demand leads to lower demand for goods and services, which tends to decrease the price level
Answer
A
Key Concept
Negative Shock to Aggregate Demand
Explanation
A negative shock to aggregate demand typically results in lower real GDP, higher unemployment, and a lower price level.
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