In the long run, what effect will a decrease in aggregate demand have on real output?

A decrease in aggregate demand can have several effects on real output in the long run. It is important to understand the factors that influence this relationship.

1. Decreased consumer spending: When aggregate demand decreases, it implies that consumers are spending less on goods and services. This reduction in consumer spending can lead to a decrease in production, as businesses respond to the lower demand by reducing their output.

2. Business investment: A decrease in aggregate demand also affects business investment decisions. If businesses anticipate lower future demand, they may be less likely to invest in expanding their production capacity or introducing new technologies. This can further contribute to a decrease in real output in the long run.

3. Unemployment and wages: As output decreases, businesses may cut back on employment to adjust to the lower demand. This leads to higher unemployment rates, lower incomes for workers, and reduced overall economic activity.

4. Potential GDP: In the long run, real output is closely tied to the economy's potential GDP, which represents the maximum level of output that can be sustained with available resources and technology. A decrease in aggregate demand can cause actual output to fall below potential GDP, indicating an underutilization of resources.

To get a more precise understanding of the effects on real output in the long run, economists use macroeconomic models, such as the AD-AS (Aggregate Demand-Aggregate Supply) framework. These models incorporate various factors, including price levels, interest rates, and government policies, to analyze the relationship between changes in aggregate demand and real output.