According to classical economists, when aggregate demand decreases
A) unemployment is reduced, the price level increases, and equilibrium real GDP is reached.
B) unemployment is reduced, the price level decreases, and equilibrium real GDP is reached.
C) unemployment temporarily increases, the price level increases, and equilibrium real GDP is reached.
D) unemployment temporarily increases, the price level decreases, and equilibrium real GDP is reached.

Question

Quizplus · Accepted Answer

According to classical economists, when aggregate demand decreases, there will be a temporary increase in unemployment as the economy adjusts to the new equilibrium. This is because firms will produce less due to the decrease in demand, leading to fewer workers being needed. This decrease in production will also lead to a decrease in the price level as there is less demand for goods and services. Eventually, the economy will reach a new equilibrium at a lower level of output and employment, with a lower price level.

According to Classical Economists, When Aggregate Demand Decreases