In new classical cycle theory, ________ bring fluctuations in real GDP around potential GDP.
A)unexpected changes in aggregate demand
B)expected changes in aggregate demand
C)fluctuations in money growth with rigid wages
D)fluctuations in investment coupled with rigid wages
E)expected changes in labour productivity

Question

Quizplus · Accepted Answer

In new classical cycle theory, unexpected changes in aggregate demand are the main source of fluctuations in real GDP around potential GDP. This is because new classical economists assume that prices and wages are flexible in the long run, and therefore changes in aggregate demand only affect output in the short run. Expected changes in aggregate demand or fluctuations in money growth or investment are not considered major sources of business cycle fluctuations in new classical theory. Expected changes in labour productivity may affect potential GDP, but not the short-run fluctuations in real GDP.

In New Classical Cycle Theory, ________ Bring Fluctuations in Real