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.more consumption and less saving
B.immediate adjustment back to potential GDP
C.increase in price inflation
D.a rise in unemployment

Answer 1

(D) a rise in unemployment

Step-by-step explanation:

A rise in unemployment is likely to follow a a decrease in aggregate demand due to a decline in consumer confidence. This is because, as aggregate demand declines, sales by businesses will fall forcing them to lay off workers, thereby resulting in a risk in unemployment.

Option A is incorrect because a decrease in aggregate demand will lead to less consumption. Option B is incorrect because an immediate adjustment back to potential GDP may not occur until monetary and fiscal policies are adjusted. Option C is incorrect because a decrease in aggregate demand resulting in lower consumption will lead to a decline in price inflation, not an increase.