Final answer:
In classical theory, a temporary increase in government purchases may lead to higher unemployment as more workers flood the job market. Employers can offer lower wages due to increased labor supply, leading to shifts in the short-run aggregate supply curve. However, in the long run, the economy is expected to self-correct and return to potential GDP with flexible wages and prices.
Step-by-step explanation:
According to the classical theory, a temporary increase in government purchases initially leads to higher unemployment, as more workers are searching for jobs. This increased labor supply allows employers to offer lower wages, resulting in wage stagnation or even declines.
Subsequently, the lower wages cause a rightward shift of the short-run Keynesian aggregate supply curve (SRAS to SRAS₁), and in the long run, the economy adjusts and returns to potential GDP. The output levels normalize, but there is a downward pressure on the price level. Over time, when wages and prices become flexible, the potential GDP along with aggregate supply determines the real GDP size.
The speed of macroeconomic adjustment is often debated. Some economists argue that wages and prices can take a long time to adjust, which might render neoclassical perspectives less practical depending on the duration. However, advocates for the neoclassical model stress its importance in understanding economic fundamentals irrespective of the adjustment duration.