The finding that output declines following the implementation of a contractionary policy by the Fed indicates that
A)reverse causation appears to explain the correlation between changes in money and changes in output.
B)money is neutral in the short run.
C)the real business cycle model's explanation of the correlation between money and output is incorrect.
D)money is neutral in the long run.

Question

Quizplus · Accepted Answer

The real business cycle model posits that economic fluctuations are primarily due to real (not monetary) shocks. If output declines following a contractionary monetary policy, it suggests that monetary factors can indeed affect output, challenging the real business cycle model's explanation.

The Finding That Output Declines Following the Implementation of a Contractionary