Question

Describe the short-run determination of equilibrium real $GDP$ and the price level in the classical model

Short answer

A rise in aggregate demand, according to the traditional model, will result in a rise in price level.

Step-by-step solution

Step: 1  Short-run determination:

The point on the $GDP$ curve where it crosses the aggregation demand curve (also known as the "equilibrium level of income"). It's important to understand the difference between short-run and long-run equilibrium output levels.

Step: 2 Price level in the classical model:

The pricing level is calculated according to a traditional model.A rise in aggregate demand, according to the traditional model, will result in a rise in price level.A experience similar of the price point whereby the genuine amount of currency, $M/P$, has to be at its lengthy equilibrium.