Figure 28-4

-Refer to Figure 28-4.A follower of the new classical macroeconomics would argue that a contractionary monetary policy to lower inflation after a supply shock,like that pursued by Volcker in 1979,would result in a movement from ________.

Question

Figure 28-4
 
-Refer to Figure 28-4.A follower of the new classical macroeconomics would argue that a contractionary monetary policy to lower inflation after a supply shock,like that pursued by Volcker in 1979,would result in a movement from ________.

Quizplus · Accepted Answer

According to new classical macroeconomics, a contractionary monetary policy aimed at reducing inflation will lead to a temporary decrease in output and employment, but in the long run, prices and wages will adjust, and the economy will return to its natural rate of output. This is represented by a movement from point C (initial equilibrium with high inflation) to point A (natural rate of output) in the long run. Therefore, the best choice is D, which shows a movement from C to A.

Figure 28-4 -Refer to Figure 28-4.A Follower of the New Classical Macroeconomics