In the new classical model, an expansionary monetary policy causes ________.
A) the aggregate demand curve to shift to the right, and output to increase only if the policy is anticipated
B) the aggregate demand curve to shift to the right, and output to increase only if the policy is unanticipated
C) a decline in the price level
D) B and C only

Question

Quizplus · Accepted Answer

In the new classical model, an expansionary monetary policy leads to an increase in output only if the policy is unanticipated. If agents expect the policy, they adjust their expectations and behavior accordingly, neutralizing the effect on output. Anticipated policies are fully incorporated into the decision-making processes of individuals and firms, leaving no impact on real variables like output.

In the New Classical Model, an Expansionary Monetary Policy Causes