A negative demand shock implies that there is a sudden decrease in aggregate demand—meaning consumers are spending less, businesses are experiencing lower sales, and overall economic activity is reduced. Let's analyze the short-run effects of this situation:
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Real Gross Domestic Product (RGDP): With decreased demand, businesses produce less. Therefore, RGDP will likely decrease.
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Price Level: With decreased demand, there will be downward pressure on prices as businesses may reduce prices to encourage consumption. Therefore, the price level is also likely to decrease.
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Unemployment Rate: As RGDP decreases and businesses reduce production, they may lay off workers or halt hiring, leading to an increase in the unemployment rate.
With this economic reasoning, the most likely short-run effects of a negative demand shock are:
- RGDP: Decrease
- Price Level: Decrease
- Unemployment Rate: Increase
Thus, the correct answer is C. RGDP: Decrease, PL: Decrease, Unemployment Rate: Increase.