Final answer:
A decrease in aggregate demand while maintaining constant price levels results in the multiplier effect working at full strength, which can lead to higher unemployment as the equilibrium GDP falls without a decrease in the price level.
Step-by-step explanation:
Assuming constant price levels, any initial decrease in aggregate demand results in the multiplier effect being at full strength. In a situation where the aggregate demand decreases, it does so without impacting the price level, leading to a rise in unemployment due to lower production levels. The original equilibrium, defined by the intersection of the aggregate demand (AD) and aggregate supply (AS) at potential GDP, indicates a fully employed economy. When AD shifts left, there is no decrease in the price level, but the equilibrium real GDP drops (at Y₁), thus creating substantial unemployment. Over time, the economy may adjust and move back towards potential GDP as wages decrease, leading to a fall in input prices and a rightward shift in the short-run aggregate supply, but at a lower price level.