Figure 7-4
-According to the classical economists when aggregate demand declines, AD0 to AD1 in the figure above, and output, falls below the natural rate of unemployment at 3000, wages and prices would
A) fall to E1 causing output to rise and unemployment would be temporary.
B) rise to E0 causing output to rise and unemployment would be temporary.
C) rise to A causing output to fall and unemployment would be temporary.
D) fall to A causing output to fall and unemployment would be permanently increased.

Question

Figure 7-4 
-According to the classical economists when aggregate demand declines, AD0 to AD1 in the figure above, and output, falls below the natural rate of unemployment at 3000, wages and prices would
A) fall to E1 causing output to rise and unemployment would be temporary. 
B) rise to E0 causing output to rise and unemployment would be temporary. 
C) rise to A causing output to fall and unemployment would be temporary. 
D) fall to A causing output to fall and unemployment would be permanently increased.

Quizplus · Accepted Answer

According to the classical economists, if aggregate demand declines and output falls below the natural rate of unemployment, wages and prices would fall to E1 causing output to rise and unemployment would be temporary. This is because lower wages and prices would eventually lead to increased demand for goods and services, resulting in an increase in output and a decrease in unemployment.

Figure 7-4 -According to the Classical Economists When Aggregate Demand Declines, AD0