In the new classical model, an unanticipated increase in the money supply will cause ________.
A) output to increase in the short run, but not in the long run
B) an increase in the price level
C) government budget deficits to increase
D) A and B only

Question

Quizplus · Accepted Answer

In the new classical model, prices are flexible in the long run, meaning that increases in the money supply will eventually be fully reflected in higher prices. However, in the short run, prices may not adjust immediately, which can lead to an increase in output. Therefore, both A and B are correct. Option C is not related to an unanticipated increase in the money supply.

In the New Classical Model, an Unanticipated Increase in the Money