According to the new classical approach, an increase in aggregate demand could lead to an increase in total output in:
A) the short run and the long run.
B) the short run but not the long run.
C) the long run but not the short run.
D) neither the long run nor the short run.

Question

Quizplus · Accepted Answer

The new classical approach suggests that in the short run, an increase in aggregate demand can lead to an increase in total output due to price and wage stickiness. However, in the long run, the economy is seen to return to its natural level of output, with changes in aggregate demand only affecting prices.

According to the New Classical Approach, an Increase in Aggregate