If there is an unanticipated increase in aggregate demand, then according to new classical economics, the economy will self-correct with an Decrease in short-run aggregate supply, so output returns to its initial level, but the price level rise
Explanation:
lets consider that an economy was initially in long-run equilibrium, now if their is an unanticipated increase in aggregate demand it will result in an temporary high level of output and employment which cannot be maintained. But when an economy is in a recession stage ,less demand for investment funds will cause the real interest rate to decline.
So we can say that ,If there is an unanticipated increase in aggregate demand, then according to new classical economics, the economy will self-correct with an Decrease in short-run aggregate supply, so output returns to its initial level, but the price level rise
