According to the classical school of economics, the ultimate effect of a decrease in aggregate demand when the economy is operating at full employment would be:
A) wages and prices fall.
B) the level of output falls.
C) the employment level falls.
D) all of the above.

Question

Quizplus · Accepted Answer

According to the classical school of economics, if aggregate demand decreases when the economy is at full employment, wages and prices would adjust downward to restore equilibrium, without affecting the level of output or employment significantly. This is because the classical view holds that the economy is self-correcting through flexible prices and wages.

According to the Classical School of Economics, the Ultimate Effect