New classical economists believe that if policy is correctly anticipated and if rational expectations hold,when the Fed increases the money supply the result will be a(n)______________ in the price level and ____________________________.

Question

Quizplus · Accepted Answer

New classical economists believe in the efficiency of markets and that individuals have rational expectations. Therefore, if the Fed increases the money supply, individuals will anticipate the inflationary effect on prices, causing prices to increase proportionally with the increase in the money supply, and there will be no change in Real GDP. This belief is based on the neutrality of money in the long run, implying that changes in the money supply only affect relative prices but not real variables such as output and employment.

New Classical Economists Believe That If Policy Is Correctly Anticipated