Multiple Choice
A decrease in aggregate demand will cause a decrease in which of the following, assuming all other factors remain constant?
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16. Aggregate Demand and Aggregate Supply Analysis
Aggregate Demand
Multiple Choice
Aggregate demand is more likely to __________ than aggregate supply in the short run.
A
remain constant
B
be unaffected by fiscal policy
C
decrease automatically
D
fluctuate
Verified step by step guidance1
Step 1: Understand the concepts of aggregate demand (AD) and aggregate supply (AS) in the short run. Aggregate demand represents 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, while aggregate supply represents the total output firms are willing to produce at different price levels.
Step 2: Recognize that in the short run, aggregate supply is often considered relatively sticky or inflexible due to factors like fixed wages, contracts, and production capacity constraints. This means AS does not change quickly in response to economic shocks.
Step 3: Understand that aggregate demand is influenced by factors such as fiscal policy (government spending and taxation), monetary policy, consumer confidence, and investment, which can change more rapidly and cause fluctuations in AD.
Step 4: Analyze why aggregate demand is more likely to fluctuate in the short run compared to aggregate supply. Since AD responds quickly to policy changes and economic conditions, it tends to move up or down, while AS remains more stable.
Step 5: Conclude that the correct completion of the sentence is that aggregate demand is more likely to 'fluctuate' than aggregate supply in the short run, reflecting its sensitivity to economic policies and external shocks.
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