Question

When aggregate demand meets aggregate supply in the horizontal portion of the aggregate supply curve, a decrease in demand will cause output to fall but no change in prices. a decrease in demand will cause prices to rise but no change in output. a decrease in demand will cause prices to fall but no change in output. a decrease in demand will cause output to rise but no change in prices.

Answer 1

Answer: Option (a) is correct.

Explanation:

Correct option:  A decrease in demand will cause output to fall but no change in prices.

When aggregate supply curve is horizontal in the AD-AS diagram then that aggregate supply curve is perfectly elastic. It means that if there is any changes in the aggregate demand, as a result quantity of output changes but price remains the same.

Hence, if there is a decrease in the aggregate demand, as a result there is a leftward shift in the aggregate demand curve which reduces the output level and price remains constant.