Figure 17-9
-Refer to Figure 17-9.A follower of the new classical macroeconomics would argue that a contractionary monetary policy to lower inflation after a supply shock,like that pursued by Volcker in 1979,would result in a movement from

Question

Figure 17-9 
-Refer to Figure 17-9.A follower of the new classical macroeconomics would argue that a contractionary monetary policy to lower inflation after a supply shock,like that pursued by Volcker in 1979,would result in a movement from

Quizplus · Accepted Answer

A follower of the new classical macroeconomics would argue that a contractionary monetary policy to lower inflation after a supply shock would result in a movement from the inflationary point C to the natural rate of output point A. This is because the new classical model emphasizes that prices are flexible and adjust quickly to changes in supply and demand, so they do not play a significant role in the long-run determination of GDP. Therefore, any attempt to reduce inflation through contractionary monetary policy would not affect long-run output but only cause a temporary fall in output levels in the short run.

Figure 17-9 -Refer to Figure 17-9.A Follower of the New Classical Macroeconomics