Question 29

A decrease in the price level with no change in the potential real GDP

When there is a decrease in aggregate demand without any change in aggregate supply in the long run, the economy experiences a decline in the overall price level while maintaining the potential real GDP.

A) A decrease in the price level with no change in the potential real GDP

This option is correct because a decrease in aggregate demand leads to lower prices in the long run, while the potential real GDP remains unchanged. In the long run, the economy adjusts to the new lower demand level, resulting in a lower price level without affecting the productive capacity.

B) A decrease in the potential real GDP but no change in the price level

This option is incorrect because a decrease in aggregate demand does not inherently reduce the potential real GDP. The potential real GDP is determined by factors such as technology and resources, which remain unchanged in this scenario.

C) An increase in the potential real GDP but no change in the price level

This option is incorrect as well, as a decrease in aggregate demand does not lead to an increase in potential real GDP. The potential GDP is not influenced by short-term fluctuations in demand; it is a long-term measure that reflects the economy's capacity.

D) An increase in the price level with no change in the potential real GDP

This option is incorrect because a decrease in aggregate demand would not result in an increase in the price level. Instead, it causes the price level to drop, contradicting the premise of this choice.

Conclusion

The correct answer is A, as it accurately describes the economic outcome of a decrease in aggregate demand while aggregate supply remains constant in the long run. Other options fail to recognize the relationship between aggregate demand changes and their impact on price levels and potential GDP.