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

Question

Quizplus · Accepted Answer

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

Suppose That the Reserve Bank Is Expected to Expand the Quantity