Expansionary fiscal policy in the classical model will cause aggregate demand to _______ potential output?
Correct answer: D. remain equal to
- A. exceeds
- B. fall below
- C. fluctuate around
- D. remain equal to
Explanation
In the classical model, output is fixed at potential by flexible prices and fully adjusting factor markets. Expansionary fiscal policy mainly raises the price level, leaving equilibrium output equal to potential output.
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The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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