Use the following to answer questions: -(Figure: AD-AS) Refer to Figure: AD-AS. Suppose that the economy starts at E₁ and moves to E₂, where AD₂intersects SRAS₁. Finally, the economy moves to E₃. The classical model of price level assumes that the economy moves from _____; thus, inflation _____ and real GDP _____. A) E₁ to E₃, ignoring E₂; increases; remains the same B) E₂ to E₃, ignoring E₁; remains the same; increases C) E₂ to E₃; decreases; remains the same D) E₁ to E₂, ignoring E₃; remains the same; remains the same

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The classical model assumes that the economy will always return to its long-run equilibrium, which occurs at the intersection of the AD and LRAS curves. In this case, the economy moves from E₁ to E₂, and then to E₃, which is the long-run equilibrium point. Therefore, the classical model assumes that inflation increases and real GDP remains the same as the economy moves from E₁ to E₃, ignoring the temporary movement to E₂.

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