Which of the following is a likely result of a decrease in aggregate demand in an economy?

• A. An increase in real GDP
• B. A decrease in the general price level (deflation)
• C. A rise in the unemployment rate
• D. An increase in aggregate supply

Answer: (B)

Verified step by step guidance

1. Step 1: Understand what aggregate demand (AD) represents. Aggregate demand is the total quantity of goods and services demanded across all levels of an economy at a given overall price level and in a given period.
2. Step 2: Recognize that a decrease in aggregate demand means that, at every price level, consumers, businesses, and the government want to buy less output than before.
3. Step 3: Analyze the effects of a decrease in AD on the economy using the aggregate demand and aggregate supply model. A leftward shift of the AD curve typically leads to a lower equilibrium price level and lower real GDP.
4. Step 4: Connect the decrease in real GDP to labor market outcomes. Lower output usually means firms produce less and may reduce their workforce, leading to a rise in the unemployment rate.
5. Step 5: Summarize the likely results: a decrease in aggregate demand tends to cause a decrease in the general price level (deflation), a decrease in real GDP, and an increase in unemployment, but it does not cause an increase in aggregate supply.