Suppose that in a new classical model the public anticipates that policymakers will increase aggregate demand.However,aggregate demand increases by less than what the public anticipated.The result in the short run is that Real GDP ____________ and the price level ____________.

Question

Quizplus · Accepted Answer

In the new classical model, the public has rational expectations and forms accurate predictions about future policies. If policymakers do not fulfill the public's expectations, there will be a discrepancy between actual and expected aggregate demand. As a result, the short-run aggregate supply curve may shift leftward, causing a decrease in real GDP. Additionally, with a lower level of output, firms may lower their prices, causing the price level to increase. Therefore, the correct answer is D.

Suppose That in a New Classical Model the Public Anticipates