Which of the following statements is correct according to both new classical and new Keynesian economists?
A)An unexpected increase in the money supply will increase only prices in the short run, whereas an unexpected increase in government spending will increase both prices and output.
B)An unexpected increase in government spending will increase both prices and output in the short run.
C)An unexpected increase in government spending will increase only output in the short run.
D)Unexpected increases in the money supply or in government spending will increase only prices in the short run.

Question

Quizplus · Accepted Answer

Both new classical and new Keynesian economists agree that an unexpected increase in government spending will increase both prices and output in the short run. This is because such an increase in spending stimulates demand, leading to higher output and, due to increased demand, higher prices as well.

Which of the Following Statements Is Correct According to Both