Suppose that the Fed implements expansionary monetary policy that raises aggregate demand,but individuals incorrectly anticipate the policy measure (bias downward).According to new classical theory,in the short run the price level would ____________ and Real GDP would ______________.In the long run,new classical theory would predict that the price level would ___________compared to its original long-run equilibrium level and that Real GDP would ____________.

Question

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In the short run, expansionary monetary policy increases aggregate demand, leading to higher prices and higher real GDP. In the long run, according to new classical theory, prices adjust fully to the change in money supply, leading to a higher price level, but real GDP returns to its natural level, remaining unchanged from its original long-run equilibrium.

Suppose That the Fed Implements Expansionary Monetary Policy That Raises