Question

If the economy adjusts through the automatic​ mechanism, then a decline in aggregate demand causes A. an expansion in the short run and an increase in the price level in the long run. B. a recession in the short run and a decline in the price level in the long run. C. a recession in the short run and an increase in the price level in the long run. D. an expansion in the short run and a decline in the price level in the long run.

Answer 1

B) a recession in the short run and a decline in the price level in the long run.

Step-by-step explanation:

An automatic adjustment mechanism is designed to prevent the economy from having large and steady deficits or surpluses. E.g. in order to correct the balance of payments and trade deficits, the country's currency would depreciate.

In this case, if the aggregate demand decreases, the aggregate supply will also decrease, increasing unemployment. An increase in unemployment will cause more people to request unemployment benefits (automatic stabilizer). At this point, the government revenue will decrease while its spending will increase, causing a larger budget deficit and sending the economy into a recession. Another automatic stabilizer acts by depreciating the US dollar and increasing the interest rates. Higher interest rates and higher unemployment result in lower inflation or general price level.

Answer 2

B

Step-by-step explanation:

a recession in the short run and a decline in the price level in the long run

In the short run a decrease in aggregate demand causes recession due to a decrease in the profitability of the market. This causes the demand curve to shift left. The impact of this leftward shift is a short run recession that is brought about by low economic activities.

To stay in business, firms will have to lay off workers causing a rise in unemployment.

There is A decline in price level in the long run due to low aggregate demand.