New classical economists say that an unanticipated increase in aggregate demand ﬁrst
A) increases the price level and real output, and then reduces short-run aggregate supply such that the economy returns to the full-employment level of output.
B) increases the price level and real output, and then increases long-run aggregate supply.
C) increases long-run aggregate supply, and then increases the price level and real output.
D) reduces short-run aggregate supply, and then reduces long-run aggregate supply.

Question

Quizplus · Accepted Answer

New classical economists argue that in the short run, an unanticipated increase in aggregate demand leads to an increase in both the price level and real output. However, this increase in real output causes the economy to move temporarily above the full-employment level of output, which causes a reduction in short-run aggregate supply. Eventually, as workers and firms adjust their expectations and contracts, short-run aggregate supply returns to its original level, and the economy returns to the full-employment level of output.

New Classical Economists Say That an Unanticipated Increase in Aggregate