Some economists believe that a positive aggregate demand shock to an economy with large amounts of excess capacity and unemployment does NOT necessarily cause an increase in prices. Economists who adhere to this belief are followers of
A) classical economics.
B) Say's laws of economics.
C) Keynesian economics.
D) supply-side economics.

Question

Quizplus · Accepted Answer

Economists who believe that a positive aggregate demand shock does not necessarily cause an increase in prices are followers of Keynesian economics. This is because Keynesian economics emphasizes the role of aggregate demand in driving economic growth and employment, and argues that in a depressed economy with high levels of idle resources, an increase in demand can lead to increased production and employment rather than inflation. Classical economics, on the other hand, emphasizes the role of supply in driving the economy and tends to argue that prices will adjust to ensure that supply and demand are always balanced. Say's Law of economics states that supply creates its own demand, which implies that there can never be a general overproduction or underproduction in the economy. Supply-side economics argues that lower taxes and deregulation can increase growth by increasing the supply of goods and services.

Some Economists Believe That a Positive Aggregate Demand Shock to an Economy