Which of the following correctly describes the new classical cycle theory of the business cycle?
A) An expected tax rate change can trigger a business cycle.
B) An expected change in the level of exports can trigger a business cycle.
C) Rational expectations keep the money wage from changing quickly.
D) An unexpected change in the quantity of money can trigger a business cycle.

Question

Quizplus · Accepted Answer

The new classical cycle theory posits that an unexpected change in the quantity of money can trigger a business cycle. This is because when the money supply increases unexpectedly, prices temporarily rise, leading to a temporary increase in output and employment. However, once the market adjusts and realizes that the increase in prices is due to an increase in the money supply, prices will return to their original levels and the economy will return to its initial level of output and employment.

Which of the Following Correctly Describes the New Classical Cycle