Figure 27-3

-In the new classical model in Figure 27-3, the initial impact of an unanticipated 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, the initial impact of an unanticipated 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, an unanticipated monetary contraction leads to a decrease in output from Yn to Y₄ and a decrease in the inflation rate from P₃ to P₄. This is because prices and wages are flexible and adjust quickly in response to changes in the money supply, resulting in a decrease in aggregate demand and output. As prices and wages adjust downward, the inflation rate also decreases.

Figure 27-3 -In the New Classical Model in Figure 27-3, the Initial