Suppose that for several periods the aggregate demand and supply curves have been intersecting at the same point, and at full employment. Then the central bank increases money growth as the result of an announced policy change. Under New Classical assumptions the likely short-run result is __________ output and __________ price level.
A) rising; a rising
B) rising; an unchanged
C) unchanged; a rising
D) unchanged; an unchanged

Question

Quizplus · Accepted Answer

According to New Classical assumptions, any short-run effects of monetary policy will be solely based on changes in expected price level. Since the economy is initially at full employment, an increase in money growth will lead to an increase in nominal wages and production costs in the short run. As firms attempt to maintain their profit margins, they will pass these higher costs on to consumers in the form of higher prices. Therefore, the short-run result of the policy change will be an unchanged output level and a rising price level.

Suppose That for Several Periods the Aggregate Demand and Supply