Figure 27-3

-In the new classical model in Figure 27-3, an anticipated 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, an anticipated 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, anticipated monetary expansion does not affect real output due to the assumption of rational expectations and fully flexible prices. However, it leads to an increase in the inflation rate.

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