In terms of the AD-AS model, the new classical approach indicates that an unexpected decrease in the money supply will affect output because it will cause
A)the SRAS curve to shift down, whereas the AD curve will be unaffected.
B)the SRAS curve to shift up, whereas the AD curve will be unaffected.
C)the AD curve to shift to the left, whereas the SRAS curve will be unaffected.
D)the AD curve to shift to the right, whereas the SRAS curve will be unaffected.

Question

Quizplus · Accepted Answer

According to the new classical approach, an unexpected decrease in the money supply will cause a contraction of the money supply and an increase in interest rates, leading to a decrease in investment and consumption. This, in turn, will cause the AD curve to shift to the left, resulting in a decrease in output. The SRAS curve is assumed to be vertical in the new classical approach as prices adjust immediately to changes in supply and demand, meaning it will remain unaffected by changes in the money supply.

In Terms of the AD-AS Model, the New Classical Approach