Suppose That Aggregate Demand Were Suddenly to Shrink by 5

question 70

Multiple Choice

Suppose that aggregate demand were suddenly to shrink by 5 percent because of a crisis affecting exports. You would expect, in the absence of any policy adjustment,

• A) that employment would climb above full employment briefly but fall back in the long run as prices rose.
• B) a period of increased unemployment in the short run that would be reversed in the long run by a reduction in inflation and prices, for which aggregate demand could again equal potential GDP.
• C) no change in employment or prices, because the aggregate demand curve would still intersect aggregate supply above potential GDP.
• D) some type of price adjustment in the export market that would cancel the export contraction.
• E) none of the above.

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