Figure 27-4

-In the new classical model in Figure 27-4, the long-run effects of an anticipated increase in aggregate demand that is less than expected ________.
A)increases output from Yn to Y₂, and the inflation rate from P₁ to P₂
B)decreases output from Yn to Y₅, and increases the inflation rate from P₁ to P₅
C)does not change output and increases the inflation rate from P₁ to P₃
D)does not affect the levels of real output or inflation

Question

Figure 27-4
 
-In the new classical model in Figure 27-4, the long-run effects of an anticipated increase in aggregate demand that is less than expected ________.
A)increases output from Yn to Y₂, and the inflation rate from P₁ to P₂ 
B)decreases output from Yn to Y₅, and increases the inflation rate from P₁ to P₅ 
C)does not change output and increases the inflation rate from P₁ to P₃ 
D)does not affect the levels of real output or inflation

Quizplus · Accepted Answer

In the new classical model, an anticipated increase in aggregate demand that is less than expected will lead to an increase in the price level from P₁ to P₃ in the long run, but will not affect the levels of real output or employment. This is because the economy will adjust to the higher price level by decreasing aggregate demand and returning to the natural rate of output in the long run. Therefore, choice C is the correct answer.

Figure 27-4 -In the New Classical Model in Figure 27-4, the Long-Run