In the new classical model, an anticipated policy of a continually increasing money supply causes ________.
A) the aggregate demand curve to shift right along a stationary aggregate supply curve, leading to continually increasing aggregate output and prices
B) the aggregate supply curve to shift left along a stationary aggregate demand curve, leading to continually contracting aggregate output and prices
C) the aggregate demand curve to shift continually to the right while simultaneously the aggregate supply curve shifts continually inward, leading to higher and higher price levels
D) the aggregate demand curve to shift continually to the left while simultaneously the aggregate supply curve shifts continually outward, leading to higher and higher price levels

Question

Quizplus · Accepted Answer

In the new classical model, an anticipated policy of a continually increasing money supply is expected to cause both the aggregate demand curve to shift continually to the right due to increased spending power, and the aggregate supply curve to shift continually inward due to increased costs, leading to higher and higher price levels without necessarily increasing output in the long run. This reflects the classical view that in the long run, money is neutral with respect to real variables like output but can affect nominal variables like the price level.

In the New Classical Model, an Anticipated Policy of a Continually