If there is an unanticipated increase in aggregate demand, then according to new classical economics, the economy will self-correct with a(n)
A) decrease in short-run aggregate supply, so output returns to its initial level but the price level rises.
B) decrease in short-run aggregate supply, so output increases and the price level rises.
C) decrease in short-run aggregate supply, so output returns to its initial level and the price level falls.
D) increase in short-run aggregate supply, so output increases and the price level rises.

Question

Quizplus · Accepted Answer

New classical economics believes in the self-correcting nature of the economy in the long run. Therefore, if there is an unanticipated increase in aggregate demand, the short-run aggregate supply will decrease, which will cause output to return to its initial level. However, the price level will rise as the decrease in short-run aggregate supply results in higher input costs.

If There Is an Unanticipated Increase in Aggregate Demand, Then