Figure 7-5

-In Figure 7-5 above,from initial point E,suppose AD₁ shifts to AD₀.Under the assumptions of classical macroeconomics,we would
A)stay at point E.
B)almost immediately move to and then stay at point A.
C)almost immediately move to and then stay at point F.
D)almost immediately move to and then stay at point B.

Question

Figure 7-5
 
-In Figure 7-5 above,from initial point E,suppose AD₁ shifts to AD₀.Under the assumptions of classical macroeconomics,we would
A)stay at point E. 
B)almost immediately move to and then stay at point A. 
C)almost immediately move to and then stay at point F. 
D)almost immediately move to and then stay at point B.

Quizplus · Accepted Answer

In classical macroeconomics, it is assumed that prices and wages are flexible and the economy is always at or moves quickly back to full employment. If the aggregate demand curve shifts from AD₁ to AD₀, it means there is a decrease in aggregate demand. However, due to the flexibility of prices and wages, the economy would adjust by moving down along the aggregate supply curve to a new equilibrium where full employment is maintained, but at a lower price level. This adjustment would happen quickly, leading to a new equilibrium point at A.

Figure 7-5 -In Figure 7-5 Above,from Initial Point E,suppose AD₁ Shifts to E,suppose