New classical economists say that a fully anticipated decrease in aggregate demand
A) shifts the long-run aggregate supply curve to the right.
B) shifts the long-run aggregate supply curve to the left.
C) moves the economy down along its vertical long-run aggregate supply curve.
D) eventually results in a self-correcting increase in aggregate demand.

Question

Quizplus · Accepted Answer

New classical economists believe that in the long run, prices and wages are flexible, so a fully anticipated decrease in aggregate demand will not impact the long-run aggregate supply curve. Instead, it will cause prices and wages to adjust downward until the economy returns to its natural level of output, moving the economy down along its vertical long-run aggregate supply curve. This process is known as the self-correcting mechanism.

New Classical Economists Say That a Fully Anticipated Decrease in Aggregate