An increase in aggregate demand in the Classical model causes the price level to
A) rise but output remains constant.
B) fall but output remains constant.
C) rise but output to fall.
D) fall but output to rise.

Question

Quizplus · Accepted Answer

According to the Classical model, output is determined by the factors of production (land, labor, and capital) and their productivity. Therefore, an increase in aggregate demand, which represents an increase in the demand for goods and services, will cause prices to rise as there is a higher demand for a given supply. However, output remains constant as the factors of production and their productivity are unchanged.

An Increase in Aggregate Demand in the Classical Model Causes