According to the classical model, an increase in aggregate demand would
A) lead the economy to recession.
B) lead the economy to a deflationary cycle.
C) cause an adjustment to a higher price level.
D) raise real Gross Domestic Product (GDP) but leave the price level unchanged.

Question

Quizplus · Accepted Answer

According to the classical model, an increase in aggregate demand would cause an adjustment to a higher price level. In the long run, prices and wages adjust to bring the economy back to its natural level of output, also known as potential output or full employment output. This means that any increase in aggregate demand will ultimately lead to an increase in the price level, but will have no effect on real GDP in the long run.

According to the Classical Model, an Increase in Aggregate Demand