Suppose that, as expected, aggregate demand in the economy sharply declines. New classical economists say that the price level will _____________ and real output will ____________.
A) fall; remain constant
B) fall; fall
C) remain constant; fall
D) remain constant; rise

Question

Quizplus · Accepted Answer

New classical economists believe that prices are flexible and will adjust to changes in demand, so if aggregate demand declines, the price level will fall. However, they also believe that the economy is always at or near its natural level of output due to rapid market adjustments, so real output will remain constant.

Suppose That, as Expected, Aggregate Demand in the Economy Sharply