In the new classical model,________.
A) all wages and prices are perfectly flexible with respect to expected changes in the price level
B) a fall in the expected price level results in an immediate and equal rise in wages and prices
C) only unanticipated policy can affect aggregate output and unemployment
D) Both A and C of the above

Question

Quizplus · Accepted Answer

In the new classical model, all wages and prices are perfectly flexible with respect to expected changes in the price level (choice A) and only unanticipated policy can affect aggregate output and unemployment (choice C). Therefore, the correct answer is both A and C, or choice D. A fall in the expected price level does not necessarily result in an immediate and equal rise in wages and prices (choice B) in the new classical model, as nominal wages and prices are allowed to adjust gradually over time.

In the New Classical Model,________