Question

If an economy experiences a decrease in aggregate demand due to a decline in consumer confidence and output falls below potential GDP, which of the following is likely to occur?

a. rise in unemployment
b. more consumption and less saving
c. immediate adjustment back to potential GDP
d. increase in price inflation

Answer 1

a. rise in unemployment

Step-by-step explanation:

Aggregate demand is a term describing the total demand for goods and services in the economy. If the aggregate demand rises, it means the country's population is requesting more goods and services. Production will increase to meet the new demand, and consequently, the GDP will grow.

Should the economy experience a fall in aggregate demand, industries will reduce the level of production. GDP is the total production in the economy. If the output is below the potential GDP, it implies a decline in production. The economy is slowing down. The manufacturing and service sectors will cut down production. Reduction in production mean industries will lay-off employees. Unemployment will rise as industries will not create employment opportunities for job seekers.