Business cycles
Short run

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