A decrease in aggregate demand will cause
A. aggregate supply to fall according to classical economists, and prices to fall according to Keynes.
B. prices to fall and unemployment to increase according to both classical economists and Keynes.
C. prices to fall according to classical economists, and unemployment to increase according to Keynes.
D. aggregate supply to fall according to Keynes, and unemployment to increase according to classical economists.
A. aggregate supply to fall according to classical economists, and prices to fall according to Keynes.
B. prices to fall and unemployment to increase according to both classical economists and Keynes.
C. prices to fall according to classical economists, and unemployment to increase according to Keynes.
D. aggregate supply to fall according to Keynes, and unemployment to increase according to classical economists.
It helps to draw the AD AS graph. Draw the graph twice:
1. with the AD curve in the Keynesian region
2. with the AD curve in the classical region.
Without moving the curve out of the region, shift it left and see the effects.
To determine the correct answer, we need to understand the relationship between aggregate demand and its impact on aggregate supply, prices, and unemployment according to classical economists and Keynes.
Aggregate demand refers to the total demand for goods and services in an economy. It consists of four major components: consumption, investment, government spending, and net exports.
Classical economists believe that the economy is self-regulating and that aggregate supply, which refers to the total output of goods and services, will automatically adjust to meet aggregate demand. According to classical economists, a decrease in aggregate demand will lead to a decrease in prices, with little impact on aggregate supply or unemployment. This suggests that option A is incorrect.
On the other hand, Keynesian economics, named after the economist John Maynard Keynes, argues that the economy is not always self-regulating, particularly in the short run. According to Keynes, a decrease in aggregate demand can lead to a decrease in both prices and output, causing unemployment to increase. This implies that option B is incorrect.
Combining the perspectives of classical economists and Keynes, the correct answer is option C - a decrease in aggregate demand will cause prices to fall according to classical economists, and unemployment to increase according to Keynes. This reflects the differing views on the impact of aggregate demand on prices and unemployment between the two economic theories.
To arrive at this answer, it is essential to have a basic understanding of classical economics and Keynesian economics and how they differ in their explanations of the relationship between aggregate demand, aggregate supply, prices, and unemployment.