-In Panel (a)of Exhibit 20A-1,the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂.Classical theory argues:
A) the federal government must shift AD₁ to AD₂ as shown in Panel (b).
B) the federal government must shift SRAS₁ to SRAS₂.
C) that SRAS₁ will shift to SRAS₂ without government intervention.
D) that AD will shift rightward without government intervention.

Question

-In Panel (a)of Exhibit 20A-1,the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂.Classical theory argues:
A) the federal government must shift AD₁ to AD₂ as shown in Panel (b). 
B) the federal government must shift SRAS₁ to SRAS₂. 
C) that SRAS₁ will shift to SRAS₂ without government intervention. 
D) that AD will shift rightward without government intervention.

Quizplus · Accepted Answer

Classical theory suggests that the economy is self-correcting and that the short-run aggregate supply (SRAS) will shift on its own to restore long-run equilibrium without the need for government intervention.

-In Panel (A)of Exhibit 20A-1,the Economy Is Initially in Short-Run