-Refer to Exhibit 16-2.Suppose the economy starts at point A.Fed monetary policy shifts the AD curve to AD₂.A rise in Real GDP is likely if the economy operates under __________ assumptions,such as wage and price __________.

Question

-Refer to Exhibit 16-2.Suppose the economy starts at point A.Fed monetary policy shifts the AD curve to AD<sub>2</sub>.A rise in Real GDP is likely if the economy operates under __________ assumptions,such as wage and price __________. A) new classical; flexibility B) new classical; inflexibilities C) new Keynesian; flexibility D) new Keynesian; inflexibilities

Quizplus · Accepted Answer

New Keynesian economics assumes wage and price inflexibilities, which means that in the short run, an increase in aggregate demand (such as a shift from AD to AD1) can lead to an increase in real GDP. This is because prices and wages do not adjust immediately to changes in demand, allowing for changes in output.