To understand the effect of an outward shift of the Aggregate Demand (AD) curve on Real Output (Y) within the context of the Classical Model, we need to consider some fundamental principles.
Key Points to Remember:
1. Long-Run Aggregate Supply (LRAS) Curve:
- In the Classical Model of aggregate demand, the LRAS curve is perfectly vertical.
- This verticality signifies that the economy’s maximum sustainable output (Y) is determined by factors such as technology, resources, and institutions. In other words, in the long-run, output is fixed at its natural level, regardless of changes in the price level.
2. Aggregate Demand (AD) Curve:
- The AD curve represents the relationship between the price level and the quantity of output demanded.
- An outward shift in the AD curve indicates an increase in aggregate demand at any given price level. Causes for such shifts can include increased consumer spending, government expenditure, or investment, among others.
3. Intersection of AD and LRAS:
- The equilibrium in the economy is determined by the intersection of the AD curve and the LRAS curve.
- Given that the LRAS curve is vertical, it ensures that in the long run, the economy operates at full employment output (Y).
Analyzing the Effect of an Outward Shift in AD:
1. Outward Shift of the Aggregate Demand Curve:
- When the AD curve shifts outward, it signifies an increase in the overall demand for goods and services in the economy.
2. Impact on Real Output (Y):
- Despite this increase in aggregate demand, the vertical LRAS curve implies that real output (Y) cannot increase beyond its natural or potential level.
- Thus, the additional demand only exerts upward pressure on the price level (inflation), without contributing to an increase in real output.
Conclusion:
Given that the LRAS curve is vertical in the Classical Model, an outward shift of the Aggregate Demand curve affects the price level but leaves the real output unchanged. Therefore, the correct answer is:
- A. The output will remain the same.
