New classical economists believe that it is possible under certain circumstances for an increase in the money supply to lead to a decrease in Real GDP in the short run.

Question

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New classical economists argue that in the short run, an increase in the money supply may lead to expectations of higher inflation and therefore higher nominal wages, leading to a decrease in real wages and potential output. This is known as the Lucas Critique. Therefore, it is possible for an increase in the money supply to lead to a decrease in Real GDP in the short run, according to new classical economists.

New Classical Economists Believe That It Is Possible Under Certain