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Given these facts: If job growth is down, retail sales slumped, and manufacturing...

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mm4stars | eNotes Newbie

Posted April 23, 2013 at 1:05 AM via web

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Given these facts:

If job growth is down, retail sales slumped, and manufacturing activity declined

What would happen to national income and to the price level in the short term?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted April 23, 2013 at 1:25 AM (Answer #1)

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In the situation that you describe, national income would drop and so would the price level.

In this scenario, national income would be way down.  Consumer spending, which is by far the largest part of GDP in rich countries, would drop significantly.  This would mean that aggregate demand would drop.  When this happens, GDP goes down. 

At the same time, the price level will drop.  You can see this if you make an aggregate supply and aggregate demand graph.  As you move your aggregate demand curve to the left (showing a drop in aggregate demand), the price level and GDP will both drop.

So, the situation you are describing should, all other things being equal, lead to a decline in aggregate demand and, thereby, to declines in GDP and the price level.

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