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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