Current equilibrium GDP is less than potential real GDP. According to the classical model of macroeconomic equilibrium, which of the following is true?
A. the economy will remain locked below full employment unless government increases aggregate demand
B. Wages and other input prices will increase thereby increasing aggregate demand until full employment is achieved
C. Aggregate supply will decrease causing the price level to increase
D. Wages and other input prices will decline thereby increasing aggregate supply until equilibrium GDP increases to equal potential real GDP
Answer: D
Microeconomics
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