Use the following to answer questions:
-(Figure: Classical Versus Keynesian Macroeconomics) Refer to Figure: Classical Versus Keynesian Macroeconomics. According to the classical view, if this economy shifts from AD₂ to AD₁, perhaps because of a large increase in government spending, the price level will _____ and real GDP will _____.

Question

Use the following to answer questions:

-(Figure: Classical Versus Keynesian Macroeconomics) Refer to Figure: Classical Versus Keynesian Macroeconomics. According to the classical view, if this economy shifts from AD₂ to AD₁, perhaps because of a large increase in government spending, the price level will _____ and real GDP will _____.

Quizplus · Accepted Answer

According to the classical view, an increase in aggregate demand (such as from a large increase in government spending) will lead to an increase in the price level, but real GDP will not change because the economy is always at full employment. The classical model assumes that prices and wages are flexible, allowing the economy to adjust back to full employment.

Use the Following to Answer Questions