Figure 27-3
-In the new classical model in Figure 27-3,an anticipated monetary contraction ________.
A) increases output from Yn to Y2, and the inflation rate from P1 to P2
B) decreases output from Yn to Y4, and the inflation rate from P3 to P4
C) does not change output and increases the inflation rate from P1 to P3
D) does not change output and decreases the inflation rate from P3 to P1

Question

Figure 27-3 
-In the new classical model in Figure 27-3,an anticipated monetary contraction ________.
A) increases output from Yn to Y2, and the inflation rate from P1 to P2 
B) decreases output from Yn to Y4, and the inflation rate from P3 to P4 
C) does not change output and increases the inflation rate from P1 to P3 
D) does not change output and decreases the inflation rate from P3 to P1

Quizplus · Accepted Answer

In the new classical model, anticipated monetary policy changes do not affect real output due to rational expectations. An anticipated monetary contraction would decrease the inflation rate without changing output.

Figure 27-3 -In the New Classical Model in Figure 27-3,an Anticipated Monetary