The new classical model has the word classical associated with it because, when an increase in the money supply is anticipated, ________.
A) aggregate output drops below the natural rate level
B) aggregate output rises above the natural rate level
C) aggregate output remains at the natural rate level
D) aggregate output increases in the short run, but not in the long run

Question

Quizplus · Accepted Answer

The new classical model assumes that prices and wages are flexible, meaning they will adjust in the long run to changes in the money supply. As a result, an anticipated increase in the money supply will not permanently affect output in the long run and aggregate output will remain at the natural rate level.

The New Classical Model Has the Word Classical Associated with It