According to the classical theory, a contractionary monetary policy ________ the price level and ________ output in the long run.

Question

Quizplus · Accepted Answer

According to the classical theory, a contractionary monetary policy reduces the money supply which increases the interest rate, thereby reducing investment and consumption in the short run. However, in the long run, the price level decreases due to the reduction in demand and the decrease in output stays constant at the natural level of output. Therefore, the correct answer is option B, which states that the output does not change in the long run.

According to the Classical Theory, a Contractionary Monetary Policy ________