In the new classical view, if the Chairman of the Fed announces a 10% increase in the money supply and then takes actions that cause the money supply to grow by 10%, the result will be
A)a 10% increase in the price level and no change in output.
B)a 10% increase in the price level and a small increase in output.
C)a less than 10% increase in the price level and a small increase in output.
D)a less than 10% increase in the price level and no change in output.

Question

Quizplus · Accepted Answer

In the new classical view, the economy is always at potential output and changes in the money supply only result in changes in the price level. Therefore, a 10% increase in the money supply will lead to a 10% increase in the price level and no change in output. This is known as the quantity theory of money.

In the New Classical View, If the Chairman of the Fed