In the new classical model,an unanticipated increase in the money supply will cause ________.
A) output to increase in the short run, but not in the long run
B) an increase in the price level
C) government budget deficits to increase
D) only A and B of the above

Question

Quizplus · Accepted Answer

In the new classical model, the economy is assumed to always be at full employment and any increase in the money supply is quickly recognized by individuals as inflationary. Therefore, in the short run, output increases due to the increase in aggregate demand, but in the long run, prices adjust to reflect the increase in the money supply, leading to no change in output but an increase in the price level. Option C is not related to an increase in the money supply in the new classical model.

In the New Classical Model,an Unanticipated Increase in the Money