According to the new classical model, changes in aggregate demand change real GDP
A) all of the time.
B) only when the changes in aggregate demand are expected.
C) only when the changes in aggregate demand are unexpected.
D) only when the short- run aggregate supply curve is vertical.

Question

Quizplus · Accepted Answer

According to the new classical model, markets always clear in the long run, so changes in aggregate demand only affect nominal variables like prices and wages in the long run. In the short run, real GDP is determined by the economy's production function and the resources available for production, not by aggregate demand. However, if there is an unexpected change in aggregate demand, it will temporarily affect real GDP in the short run until prices and wages adjust to their long-run levels. Therefore, changes in aggregate demand affect real GDP only when they are unexpected.

According to the New Classical Model, Changes in Aggregate Demand