-In the new classical model in the figure above, the initial impact of an unanticipated monetary contraction ________. A) increases output from Y_n to Y₂, and the inflation rate from P₁ to P₂ B) decreases output from Y_n to Y₄, and the inflation rate from P₃ to P₄ C) does not change output and increases the inflation rate from P₁ to P₃ D) does not change output and decreases the inflation rate from P₃ to P₁

Question

Quizplus · Accepted Answer

In the new classical model, an unanticipated monetary contraction typically leads to a decrease in output and an increase in the inflation rate in the short run, due to sticky prices and wages. However, without the specific details of the figure mentioned, the general principle is that output decreases and inflation initially might rise due to the slow adjustment of prices and wages, but the provided options do not align perfectly with standard economic theory. Choice B is selected based on the typical expected outcome of decreased output following an unanticipated monetary contraction, despite the mismatch in inflation expectations.

-In the New Classical Model in the Figure Above, the Initial