In the new classical model,an expansionary monetary policy will lead to a decline in aggregate output if the increase in money supply is ________ anticipated.
A)less than
B)greater than
C)not
D)as

Question

Quizplus · Accepted Answer

In the new classical model, agents have rational expectations and they form accurate predictions about future economic variables. When an expansionary monetary policy is implemented, agents will adjust their behavior in anticipation of the increase in output, leading to an increase in prices and wages, which will offset the short-term boost to output. Therefore, an expansionary monetary policy will only lead to a decline in output if it is less than anticipated, catching agents off guard and allowing output to temporarily increase.

In the New Classical Model,an Expansionary Monetary Policy Will Lead