Suppose an economy originally in long-run equilibrium experiences a decrease in aggregate demand. According to the classical model
A) real Gross Domestic Product (GDP) will not change but the price level will fall.
B) real Gross Domestic Product (GDP) will fall, and then the price level will fall also.
C) the price level will not change but real Gross Domestic Product (GDP) will fall.
D) real Gross Domestic Product (GDP) will fall, wages will fall, but the prices of goods and services will stay the same.

Question

Quizplus · Accepted Answer

In the classical model, it is believed that the economy is always at or returns quickly to full employment. A decrease in aggregate demand would lead to a decrease in the price level, but the real GDP would remain unchanged because the economy adjusts through changes in prices, not output.

Suppose an Economy Originally in Long-Run Equilibrium Experiences a Decrease