Question

In macroeconomics, the immediate short run is known as a length of time when both input prices and output prices are fixed. In the short-run, input prices are fixed but output prices are variable. In the long run, input prices and output prices can vary. • What happens in the immediate short-run when AD falls from AD to AD2 to the price level and output? • What happens in the short-run when AD falls from AD to AD2 to the price level and output? • What will happen in the long-run?

Answer 1

When the aggregate demand falls in the market then demand curve is shifted to the left and the new equilibrium is at a lower price and lower output in the short run.

This will increase the unemployment in the market and lead to a fall in the wages, in the long run the supply curve will shift to the right due to lower wages and that will lead to an increase in the output, fall in the price level.

THe output will be at a lower price but at the potential level of output in the long run.