Suppose that the Federal Reserve is expected to expand the quantity of money by 5 percent but ends up expanding it by only 2 percent. If the new Keynesian theory is correct, which of the following describes the effect on the economy?
A) Inflation will be higher than expected.
B) Workers' decisions about when to work will be affected.
C) A recession will ensue.
D) The economy experience a boom because the quantity of money is still growing.

Question

Quizplus · Accepted Answer

According to new Keynesian theory, if the money supply grows less than expected, it can lead to lower aggregate demand, potentially causing a recession.

Suppose That the Federal Reserve Is Expected to Expand the Quantity