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A decrease in business investment demand causes equilibrium real GDP to fall below potential real GDP. Accordi

A decrease in business investment demand causes equilibrium real GDP to fall below potential real GDP. According to the classical model for macroeconomic equilibrium, (a) nominal wages will fall. (b) there will be no effect on aggregate supply. (c) aggregate supply will decrease. (d) there will be no effect on nominal wages.

Public Comments

1. The correct answer is: (c) aggregate supply will decrease. [Although in the classical model, a decrease in business investment will cause initially a drop in real GDP, the market mechanism will operate to restore back to full employment through wage price flexibility.and the correct answer should be option (b) there will be no effect on aggregate supply., in the way the question has been formulated, the best answer is option (c). because fall in equilibrium real GDP below potential, i.e. full employment.)