Question

Which of the following will cause a negative aggregate demand shock?

a) a decrease in the domestic price level
b) an increase in government expenditures
c) an increase in the domestic price level
d) an increase in the price of raw material
e) a decrease in the domestic price level.

Answer 1

A negative aggregate demand shock can occur due to a decrease in the domestic price level or an increase in the price of raw material.

Step-by-step explanation:

A negative aggregate demand shock can be caused by a decrease in the domestic price level (option a) or an increase in the price of raw material (option d).

When the domestic price level decreases, it leads to a fall in overall consumer spending, as consumers can purchase goods and services at a cheaper price. This decrease in consumer spending causes a decrease in aggregate demand.

An increase in the price of raw material also leads to a negative aggregate demand shock. This increase in input costs raises production costs for businesses, which in turn reduces their output and overall spending in the economy.