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I know that a shift rightwards in aggregate demand would cause an inflationary gap according to the New Classical model. It would cause price levels to rise and prices of factors of production to increase because firms bid up the prices when trying to increase their output.

However, for a shift leftwards in aggregate demand, why would the price levels of goods/services fall and the prices of factors of production decrease? Is it due to the decrease in firms' demand for factors of production and the lack of bidding, or another reason?

Thank you!

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  • $\begingroup$ Please clarify your specific problem or provide additional details to highlight exactly what you need. As it's currently written, it's hard to tell exactly what you're asking. $\endgroup$
    – Community Bot
    Oct 17 at 2:47
  • $\begingroup$ I just wanted to know the reason why price levels of goods/services fall and the prices of factors of production decrease when that shift occurs, as a general case. $\endgroup$
    – econ
    Oct 17 at 19:06

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