Question

    In the Classical model, if there is an increase in aggregate demand, what will be the long-run effect on output and prices? 

    A Output increases, prices increase Correct Answer Incorrect Answer
    B Output decreases, prices increase Correct Answer Incorrect Answer
    C Output remains constant, prices increase Correct Answer Incorrect Answer
    D Output increases, prices remain constant Correct Answer Incorrect Answer

    Solution

      In this case, AS is vertical and AD is downward sloping, hence if AD shifts right, at new equilibrium there is increase in price and no change in output.

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