A larger than expected increase in aggregate demand will lead to __________in the __________of the business cycle.
A) an expansion; real business cycle theory
B) a recession; new Keynesian cycle theory
C) a recession; Keynesian cycle theory
D) an expansion; new classical cycle theory

Question

Quizplus · Accepted Answer

According to new classical cycle theory, an increase in aggregate demand will lead to an expansion in the business cycle, as markets will naturally adjust to the new level of demand without the need for government intervention. Choice A is incorrect because real business cycle theory does not necessarily predict the impact of changes in aggregate demand on the business cycle. Choices B and C are incorrect because both Keynesian cycle theory and new Keynesian cycle theory suggest that an increase in aggregate demand will lead to inflationary pressures and eventually a recession, as the economy becomes overheated and prices rise.

A Larger Than Expected Increase in Aggregate Demand Will Lead