In case of the classical model, increase in aggregate expenditure would:
A) shift the aggregate demand curve upward leading to an increase in real GDP and prices.
B) shift the aggregate demand curve downward leading to an increase in real GDP and prices.
C) shift the aggregate demand curve upward leading to a decrease in real GDP and prices.
D) shift the aggregate demand curve downward leading to a decrease in real GDP and prices.
E) shift the aggregate demand curve upward leading to an increase in prices and no change in real GDP.

Question

Quizplus · Accepted Answer

In the classical model, the economy is assumed to be at full employment, so an increase in aggregate expenditure would primarily lead to an increase in prices rather than an increase in real GDP, as the economy's output is already at its potential.

In Case of the Classical Model, Increase in Aggregate Expenditure