The new classical theory argues that the primary factor leading to business cycles is
A)expected fluctuations in aggregate demand.
B)expected fluctuations in short-run aggregate supply.
C)unexpected fluctuations in aggregate demand.
D)unexpected fluctuations in short-run aggregate supply.
E)unexpected fluctuations in long-run aggregate supply.

Question

Quizplus · Accepted Answer

The new classical theory argues that business cycles are primarily caused by unexpected fluctuations in aggregate demand. According to this theory, changes in aggregate demand can only affect employment and output in the short run. In the long run, prices and wages adjust to restore equilibrium, meaning there is no persistent unemployment or output gap except in the presence of unexpected fluctuations in aggregate demand.

The New Classical Theory Argues That the Primary Factor Leading