Final answer:
According to new classical economics, changes in aggregate demand only cause short-run changes in output and employment, with no long-run impact on these variables. The economy eventually returns to its potential GDP, driven by factors that determine aggregate supply, with any persistent effect manifesting as changes in the price level but not in output or employment levels. The correct answer is option: a) short-run changes in output and employment.
Step-by-step explanation:
New classical economics suggests that, in the long-run, changes in aggregate demand will cause only short-run changes in output and employment. Essentially, neoclassical economists assert that in the long run, the economy is guided by aggregate supply, because the aggregate supply curve is vertical at potential GDP. Therefore, any changes in aggregate demand will not affect the long-run levels of output and employment, which are determined by factors such as technology, resources, and institutions.
When it comes to adjustment processes, neoclassical economists argue that while there can be short-run effects on output and prices due to aggregate demand fluctuations, in the long run, these do not persist. Wages and prices adjust over time, leading the economy back to its potential output, with the primary long-lasting effect being a change in the price level rather than in output and employment levels.
However, there is debate on the speed of macroeconomic adjustment, with Keynesian economists arguing that this return to potential GDP can take a very long time, during which neoclassical assumptions may not hold practical relevance.