Question

new classical economists say that an unanticipated increase in aggregate demand first group of answer choices 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. increases the price level and real output, and then increases long-run aggregate supply. increases long-run aggregate supply, and then increases the price level and real output. reduces short-run aggregate supply, and then reduces long-run aggregate supply.

Answer 1

An unanticipated increase in aggregate demand initially increases the price level and real output, and then reduces short-run aggregate supply, bringing the economy back to the full-employment level of output.

• The new classical economists argue that an unanticipated increase in aggregate demand first 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.
• In the long run, the increase in price level puts downward pressure on the price level, and wages and prices adjust to their new levels.
• The short-run Keynesian aggregate supply curve shifts to the right, and the economy returns to its potential GDP.
• Therefore, the correct option is: 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.