Question

Which of the following are the most likely short-run effects of a negative demand shock?
Real Gross Domestic Product(RGDP) Price Level Unemployment Rate
A. Increase Decrease Decrease
B. Decrease Decrease Decrease
C. Decrease Decrease Increase
D. Increase Decrease Increase
A. RGDP: Increase, PL: Decrease, Unemployment Rate: Decrease
B. RGDP: Decrease, PL: Decrease, Unemployment Rate: Decrease
C. RGDP: Decrease, PL: Decrease, Unemployment Rate: Increase
D. RGDP: Increase, PL: Decrease, Unemployment Rate: Increase

Answer 1

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:

1. **Real Gross Domestic Product (RGDP)**: With decreased demand, businesses produce less. Therefore, RGDP will likely decrease.

2. **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.

3. **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**.