Answer to Question #119008 in Macroeconomics for Aynul

Question

. Suppose the economy is in the long-run equilibrium & everybody in the economy is affected by a buying bugs, so they all start buying more. With the aid of appropriate diagram/s show and explain what will happen in the economy, according to the Classical Perspective. *

Answer 1

The Classical view is that Long Run Aggregate Supply (LRAS) is inflexible. The classical view suggests that real growth domestic product is determined by factors such as supply, the level of investment. Classical economists further suggest that in the long-term, an increase in aggregate demand, will just cause inflation and will not increase real growth domestic product.

In our case people speculated that prices for bugs would rise, this made them buy more goods before the prices would rise. Since people were buying more goods in the long run the demand for bugs would increase and this will create a shortage for the supply of bugs in the market.

The aggregate demand for bugs will shift from AD1 to AD2 but there will be no change real growth domestic product.

It is illustrated by the following graph in the long run.