Suppose that for several periods the aggregate demand and supply curves have been intersecting at the same point, and at full employment. Then the central bank increases money growth as the result of an unannounced policy change. Under New Classical assumptions the likely short-run result is __________ output and __________ price level.
A) rising; a rising
B) rising; an unchanged
C) unchanged; a rising
D) unchanged; an unchanged

Question

Quizplus · Accepted Answer

Under New Classical assumptions, unanticipated changes in monetary policy can affect output and prices in the short run. If the central bank increases money growth unexpectedly, it is likely to lead to a short-run increase in both output and the price level, as people initially mistake the increase in nominal demand for an increase in real demand.

Suppose That for Several Periods the Aggregate Demand and Supply