Chapter 19, Problem 7MCQ

To determine

The wages, aggregate price level, and GDP in long run equilibrium with the existence of negative demand shock

Answer to Problem 7MCQ

From the available options, the correct option is decrease in wages, decrease in aggregate price level, and decrease in GDP.

Explanation of Solution

In long-run equilibrium, a negative demand shock means there is less demand of goods in the market which shows decrease in wages due to high unemployment, decrease in price level because less demand of goods would cause large supply in the market, and real GDP would decrease because people consume less.

Therefore, the correct option is e (decrease in wages, decrease in aggregate price level, and decrease in GDP) and other all options are incorrect because if there is increase in wages then economy in long run equilibrium will not experience negative demand shock because people will demand more due to their high level of income. And, real GDP would not change only if there is no variations in wage rate and price level in economy.

Economics Concept Introduction

Introduction: An economy of the country is a system of trade through which wealth is made and used in the country such as consumption and production of goods.

Any unexpected or uncertain event that cause the demand of goods and services in the market which in turn also affect the price of those goods and service is called demand shock.