Answer to Question #126895 in Macroeconomics for alina

Question

Explain how aggregate demand is determined within the classical model. What would be

the effects on output and the price level of a drop in money supply?

Answer 1

According to the classical model, aggregate demand(AD) is predetermined by money supply for instance the amount of money and their purchasing power.

 Drop in the money supply will lead to a decrease in consumer spending. This decrease will shift the AD curve to the left. This drop in money supply reduces price levels and real output because there is less capital available in the economic system.