Short run

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In the short run the decrease in aggregate demand brings along the following effects:
  • as the total real expenditures are now lower than total real production producers are going to decrease product prices in order to sell them which means that inflation decreases;
  • since factor prices are fixed in the short run but prices have decreased, producers are going to decrease their production quantities;
  • under the decrease in production quantities, producers` demand for labor decreases and as a consequence unemployment increases.

Short run developments induced by decrease in AD are shown graphically below.


Figure 5. Decrease in AD in the short run