Suppose that the Federal Reserve is expected to expand the quantity of money by 5 percent but ends up expanding it by only 2 percent. If the new Keynesian theory is correct, which of the following describes the effect on the economy?
A) Workersʹ decisions about when to work will be affected.
B) A recession will ensue.
C) Inflation will be higher than expected.
D) The economy experience a boom because the quantity of money is still growing.

Question

Quizplus · Accepted Answer

According to new Keynesian theory, if the money supply grows less than expected, it can lead to lower aggregate demand, resulting in a recession.

Suppose That the Federal Reserve Is Expected to Expand the Quantity