-In the new classical model in the figure above, the long-run effects of an anticipated increase in aggregate demand that is less than expected ________. A) increases output from Y_n to Y₂, and the inflation rate from P₁ to P₂ B) decreases output from Y_n to Y₅, and increases the inflation rate from P₁ to P₅ C) does not change output and increases the inflation rate from P₁ to P₃ D) does not affect the levels of real output or inflation

Question

Quizplus · Accepted Answer

In the new classical model, anticipated changes in aggregate demand are fully incorporated into price expectations. Therefore, if the actual increase in aggregate demand is less than expected, it does not affect the output level because the economy is already at its natural level of output. However, the inflation rate increases because the actual price level ends up being higher than what was expected, given that the actual increase in demand was less than anticipated.

-In the New Classical Model in the Figure Above, the Long-Run