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Chapter 19: Q5. (page 405)

An economy is producing at full employment when AD unexpectedly shifts to the left. A new classical economist would assume that as the economy adjusts back to producing at full employment, the price level will ________.

a. increase

b. decrease

c. stay the same

Short Answer

Expert verified

The correct option is (b): decrease.

Step by step solution

01

Explanation

The aggregate supply curve at full employment is vertical. When the AD shifts to the left, the output and price reduces. Assuming that the input prices are flexible, the nominal returns to the inputs will fall as the demand for inputs will fall. So, the AS will increase and shift to the right, where it produces the output again at the full employment level. However, the price level has been reduced in the process.

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Most popular questions from this chapter

If the money supply fell by 10 per cent, a monetarist would expect nominal GDP to __________.

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