Graham B. answered • 03/06/23
Assistant Professor of Economics
According to classical aggregate supply theory, an increase in aggregate demand (AD) through government intervention would not affect output in the long run. This is because, in the long run, output is determined by the economy's supply-side factors such as labor force, capital stock, and technology, which are assumed to be fixed in the classical model. Therefore, any short-term increase in output due to increased AD would be temporary, and the economy would eventually return to its natural level of output in the long run.
However, in the short run, an increase in AD could lead to an increase in output due to firms increasing production to meet the higher demand. This could lead to a temporary reduction in unemployment as firms increase their hiring to produce more output.
An increase in AD could also lead to an increase in the price level in the short run, as firms increase their prices to take advantage of the higher demand. However, in the long run, prices would adjust to the increase in demand, and the price level would return to its natural level.
