In the view of the new classical economists, an increase in the money supply will affect aggregate output and employment ________.
A) only if the increase in money supply is anticipated
B) only if the increase in money supply is expected
C) only if the increase in money supply is unanticipated
D) only if the increase in money supply is the result of an announced open market operation

Question

Quizplus · Accepted Answer

According to the new classical economists, aggregate output and employment are determined by the long-run supply side factors including technology, capital stock and labor force. In the short-run, changes in the money supply may only affect the price level if they are anticipated by the public, thus affecting inflation expectations. Only unanticipated changes in the money supply can affect output and employment, as they may cause temporary confusion in markets leading to changes in relative prices and misallocation of resources. Therefore, an increase in the money supply will affect aggregate output and employment only if the increase in money supply is unanticipated.

In the View of the New Classical Economists, an Increase