New classical economists say that an unanticipated increase in aggregate demand first:
A) increases the price level and real output,and then reduces short-run aggregate supply such that the economy returns to the full-employment level of output.
B) increases the price level and real output,and then increases long-run aggregate supply.
C) increases long-run aggregate supply,and then increases the price level and real output.
D) reduces short-run aggregate supply,and then reduces long-run aggregate supply.

Question

Quizplus · Accepted Answer

New classical economists argue that in the short run, an unanticipated increase in aggregate demand will increase both the price level and real output. However, this increase in output causes a reduction in short-run aggregate supply, which eventually leads to higher prices and a return to the full-employment level of output in the long run. Therefore, option A is the best choice. Options B, C, and D are incorrect as they do not fully capture the sequence and relationship between the increase in aggregate demand, price level, real output, and aggregate supply.

New Classical Economists Say That an Unanticipated Increase in Aggregate