In the classical model, a decrease in aggregate demand will:
A) cause inflation to rise in the short run.
B) lead to lower wages and prices, bringing the economy back to full employment.
C) be offset by a decrease in aggregate supply.
D) require government intervention to return the economy back to full employment.

Question

Quizplus · Accepted Answer

In the classical model, it is believed that the economy is self-correcting. A decrease in aggregate demand is thought to lead to lower wages and prices, which in turn would restore the economy to its full employment level without the need for government intervention.

In the Classical Model, a Decrease in Aggregate Demand Will