Final answer:
According to the neoclassical perspective, increasing aggregate demand to achieve zero percent unemployment in the short run will temporarily increase output. In the long run, output returns to potential GDP. The impact on the price level is upward pressure in the short run and downward pressure in the long run.
Step-by-step explanation:
Neoclassical perspective on the impact of macroeconomic policy
According to the neoclassical perspective, if the government increases aggregate demand to achieve zero percent unemployment in the short run, it will lead to an increase in output.
This is because more spending will create a higher demand for goods and services, stimulating production.
However, in the long run, when wages and prices are flexible, the increase in aggregate demand will only lead to a temporary increase in output.
Eventually, the level of output returns to the potential GDP, where it started.
Impact on the price level
In the short run, the increase in aggregate demand can cause upward pressure on the price level due to a higher demand for goods and services.
However, in the long run, when wages and prices are flexible, there will be downward pressure on the price level.
Aggregate demand/aggregate supply diagram
In the short run, the aggregate demand curve shifts to the right, leading to a higher level of output. However, in the long run, the aggregate supply curve also shifts to the right, bringing the level of output back to the potential GDP.
he price level may increase in the short run but experiences downward pressure in the long run.