In the classical model
A) a decrease in aggregate demand will lead to a decrease in the price level and a decrease in real GDP.
B) changes in aggregate supply leave real GDP unchanged.
C) a decrease in aggregate demand will lead to an increase in the price level and a decrease in real GDP.
D) changes in aggregate demand affect only the price level, not real GDP.

Question

Quizplus · Accepted Answer

In the classical model, it is assumed that the economy is always at full employment, and prices are flexible. Therefore, changes in aggregate demand are believed to affect only the price level, not the real GDP, which remains constant due to the economy's self-correcting mechanism.

In the Classical Model