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According to the Classical model, if government suddenly spends more for space travel programs, this will cause Aggregate Demand to fall, causing prices to fall, but no change in long-run GDP Aggregate Demand to rise, causing prices to increase, but no change in long-run GDP. Aggregate Demand to fall, causing prices to fall and long-run GDP to fall Aggregate Demand to rise, causing prices to rise and long-run GDP to rise.

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Answer #1

Solution: aggregate demand to fall, causing prices to fall, but no change in long-run GDP

Explanation: According to the classical model, the fiscal and monetary policy i.e. demand-management policy is ineffective and unnecessary. Higher government spending, for example, will cause decreases in both consumption spending as well as investment which, in total, are equal to the increase in government spending. Consequently the total spending will remain unchanged, even though government spending is greater.

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