From the perspective of classical macroeconomic theory, an excess of aggregate spending would:
A) Increase aggregate output and the level of employment in the economy
B) Decrease the rate of interest and lower the level of investment
C) Increase consumption, and thus move the economy toward the full-employment level of output
D) Increase prices, wages, and interest rates, and thus reduce aggregate spending to equal the full-employment level of output

Question

Quizplus · Accepted Answer

According to classical macroeconomic theory, an excess of aggregate spending would lead to an increase in prices, wages, and interest rates. This would, in turn, reduce aggregate spending to equal the full-employment level of output. When prices and wages increase, the aggregate supply curve shifts upward, reducing output and employment. Similarly, higher interest rates reduce investment spending, causing a decrease in aggregate demand. This process continues until the economy reaches a new equilibrium at the full-employment level of output, where aggregate demand equals aggregate supply.

From the Perspective of Classical Macroeconomic Theory, an Excess of Aggregate