Homework Answers
Answer 7
The correct answer is (e) a decrease in aggregate demand.
AD curve is downward sloping and AS curve is upward sloping. Decrease in Demand results in AD curve to shift leftward and hence at the current price level there will be excess aggregate supply. and hence this will result in decrease in price and as price decrease aggregate supply will move downwards till it intersects New Aggregate demand curve.
Hence, Decrease in demand will result in decrease in Real Output and hence results in economic recession and also results in decrease in price i.e. results in deflation.
Hence, the correct answer is (e) a decrease in aggregate demand.
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