In the long-run, if aggregate demand falls, how can the economy return to the full-employment level of GDP?

When aggregate demand falls, it can lead to a reduction in output and employment, moving the economy away from its full-employment level of GDP. For the economy to return to this full-employment level in the long run, the short-run aggregate supply curve needs to adjust.

Decreasing wages and resource costs is a crucial mechanism that facilitates this adjustment. When wages and resource costs decrease, it becomes less expensive for firms to produce goods and services. This reduction in costs allows the short-run aggregate supply curve to shift to the right. As the short-run aggregate supply increases, the economy moves towards a higher level of output and employment, which helps in returning to the full-employment level of GDP.

This process reflects the long-run adjustment mechanism in response to reduced aggregate demand. By allowing for lower production costs, firms can regain competitiveness and stimulate economic activity, thus restoring the equilibrium at full employment.