According to New Keynesians, why does an expected change in the money supply affect output in the short run?
A)Firms have imperfect information.
B)People expect central banks to increase the money supply in response to increases in output.
C)Many prices are set by long-term contracts and thus cannot respond quickly to increases in the money supply.
D)Prices are flexible in the short run.

Question

Quizplus · Accepted Answer

According to New Keynesians, expected changes in the money supply affect output in the short run because many prices are set by long-term contracts and cannot respond quickly to increases in the money supply. Therefore, changes in the money supply affect the real value of wages and prices, leading to changes in output and employment.

According to New Keynesians, Why Does an Expected Change in the Money