Question

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.

Answer 1

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.

Answer 2

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.