Figure 27-3

-In the new classical model in Figure 27-3, the long-run effect of an unanticipated monetary expansion ________.
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, the long-run effect of an unanticipated monetary expansion ________.
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, an unanticipated monetary expansion does not change output in the long run, but it does increase the inflation rate from P₁ to P₃. Therefore, option C is the correct choice. Options A and B are incorrect because they suggest changes in output, which does not occur in the long run according to the new classical model. Option D is also incorrect because it suggests a decrease in inflation rate, which does not happen in the new classical model.

Figure 27-3 -In the New Classical Model in Figure 27-3, the Long-Run