According to new classical economists, if the Fed increases the money supply after it announces it, output ________ and the price level ________.
A) increases; remains constant
B) remains constant; increases
C) remains constant; remains constant
D) increases; increase

Question

Quizplus · Accepted Answer

According to new classical economists, when the Fed increases the money supply after it announces it, individuals will expect prices to increase in the future. As a result, this will increase demand and cause prices to rise immediately, leading to an increase in the price level. However, output will remain constant in the short run as prices adjust. Therefore, the correct choice is B, where the price level increases but output remains constant.

According to New Classical Economists, If the Fed Increases the Money