If the economy is initially at equilibrium and an unexpected decline in aggregate demand takes place, in the short run aggregate output will
A)fall in the new classical view, but not in the new Keynesian view.
B)fall in the new Keynesian view, but not in the new classical view.
C)fall in both the new Keynesian and new classical views.
D)remain at full employment in both the new classical and new Keynesian views.

Question

Quizplus · Accepted Answer

The new classical view suggests that prices and wages are flexible in the short run, while the new Keynesian view suggests that prices and wages are sticky in the short run. Therefore, in the short run, an unexpected decline in aggregate demand will lead to a fall in output in both the new classical and new Keynesian views.

If the Economy Is Initially at Equilibrium and an Unexpected