Final answer:
While a decrease in aggregate supply can lead to recession-like conditions in the short term, characterized by higher unemployment and lower GDP, neoclassical economics suggests that long-term effects may be mitigated by market adjustments that restore the economy to its potential GDP, albeit with potential downward pressure on prices.
Step-by-step explanation:
A decrease in aggregate supply, shown by a leftward shift of the short-run aggregate supply (SRAS) curve, can initially lead to undesirable economic outcomes, including higher unemployment, inflation (or stagflation), and reduced GDP—a situation often indicative of a recession. These consequences emerge because the economy must adjust to higher input costs, like labor or energy, which reduce production profitability. Particularly, a sudden event like a pandemic can aggravate these effects by causing worker shortages, contributing to an acute decline in the supply of goods and services.
However, from a neoclassical perspective, this is not the end of the story. Over the long run, flexible wages and prices enable the economy to adjust and return to potential GDP, thereby mitigating the adverse effects on economic performance. As wages stabilize at lower levels, the SRAS curve may shift rightward, restoring the level of output but potentially leading to lower prices.
Ultimately, these dynamics highlight that while decreases in aggregate supply are harmful in the short run, their overall impact on national economic performance can be more nuanced. In the neoclassical view, potential GDP is unaffected in the long run, and natural market adjustments restore economic balance, with the key caveat of potential deflationary pressure.