An economy is currently in equilibrium at full employment. If there is an anticipated decrease in demand, which of the following effects can be seen in the short run?
I. Real GDP decreases.
II. The supply curve shifts to the right.
III. The demand curve moves to the left.
IV. Prices decrease.
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A. B. C. D.Explanation
If the buyers and sellers in the resource market completely anticipate the effects of a decrease in demand, then they will correctly forecast the lower future inflation. This will prompt buyers to postpone current consumption and wait till prices drop. On the other hand, suppliers would prefer to sell today,while prices are high, instead of waiting till the prices fall. The demand curve will therefore quickly move to the left and the supply curve will move to the right. An equilibrium will be reached at a lower price which leaves the real quantities unaffected, changing only the nominal variables.