In the new classical model, an unanticipated increase in the money supply causes ________.
A) the aggregate demand curve to shift to the right along a stationary aggregate supply curve
B) both the aggregate demand and supply curves to shift simultaneously to the right
C) the aggregate demand curve to shift to the right as the aggregate supply curve simultaneously shifts to the left
D) both the aggregate demand and supply curves to shift simultaneously to the left

Question

Quizplus · Accepted Answer

In the new classical model, the economy is always at full employment equilibrium, so any increase in the money supply is assumed to be unanticipated. As a result, the increase in the money supply causes an increase in aggregate demand. However, since the economy is already at full employment, the increase in demand leads to higher prices and no change in output. Therefore, the aggregate demand curve shifts to the right along a stationary aggregate supply curve.

In the New Classical Model, an Unanticipated Increase in the Money