Final answer:
The short-run aggregate supply curve suggests that a decrease in the price level leads to a fall in the quantity of aggregate output, due to a leftward shift in aggregate demand that results in lower equilibrium output and potentially higher unemployment.
Step-by-step explanation:
According to the short-run aggregate supply curve, when the price level falls, the quantity of aggregate output also falls. This relationship is explained by the upward sloping short-run Keynesian aggregate supply (SRAS) curve, which indicates that at lower price levels, firms have less incentive to produce, leading to a reduction in output. On the other hand, the long-run neoclassical aggregate supply curve (LRAS) is vertical, indicating that price level changes do not affect the economy's output in the long run.
When there is a decrease in aggregate demand, such as a decline in consumer confidence causing less consumption and more saving, the aggregate demand curve shifts to the left. This shift leads to a new equilibrium with a lower quantity of aggregate output and potentially higher unemployment if the output falls below potential GDP.