In the figure above, from initial point E, suppose AD1 shifts to AD0. Under the assumptions of classical macroeconomics, we would
A) stay at point E.
B) almost immediately move to and then stay at point A.
C) almost immediately move to and then stay at point F.
D) almost immediately move to and then stay at point B.

Question

Quizplus · Accepted Answer

According to classical macroeconomics, the economy is self-regulating and will always return to its long-run equilibrium. In this case, if AD1 shifts to AD0, this would indicate a decrease in aggregate demand. The economy would adjust by reducing output and prices until it reaches the new long-run equilibrium at point A. Therefore, we would almost immediately move to and then stay at point A.

In the Figure Above, from Initial Point E, Suppose AD1