A negative demand shock affects unemployment and output in the short run how?

A negative demand shock affects unemployment and output in the short run how?

• A. Unemployment falls and output rises.
• B. Unemployment rises and output falls.
• C. Unemployment rises but output remains the same.
• D. Unemployment falls but output falls.

Answer: (B)

A negative demand shock reduces aggregate demand, and in the short run that leads to lower output and higher unemployment. When demand for goods and services falls, firms cut back production to match the weaker demand, so real GDP falls. With production down, firms need fewer workers, which means unemployment rises. Prices and wages may be slow to adjust in the short run, reinforcing the move: the economy ends up with lower output and higher unemployment as the demand shock plays out.

A negative demand shock reduces aggregate demand, and in the short run that leads to lower output and higher unemployment. When demand for goods and services falls, firms cut back production to match the weaker demand, so real GDP falls. With production down, firms need fewer workers, which means unemployment rises. Prices and wages may be slow to adjust in the short run, reinforcing the move: the economy ends up with lower output and higher unemployment as the demand shock plays out.