Refer to Figure 17.3. Suppose the economy is at Point A. According to the new classical theory, an anticipated increase in aggregate demand
A) leaves the economy at Point A.
B) moves the economy to Point B.
C) moves the economy to Point C.
D) moves the economy to Point D.

Question

Quizplus · Accepted Answer

According to the new classical theory, an anticipated increase in aggregate demand leads to an immediate adjustment in expectations, resulting in a movement along the long-run aggregate supply curve to a new equilibrium at Point C, where output remains at its natural level but the price level increases.