According to new classical economists, sustained expected increases in the nominal money supply will lead to
A)increases in output in the short run and sustained increases in prices in the long run.
B)sustained increases in prices, with no short-run increases in output.
C)short-run increases in prices and output, with a stable price level and no increases in output in the long run.
D)sustained increases in both prices and output in the long run.

Question

Quizplus · Accepted Answer

New classical economists believe in the neutrality of money in the long run, meaning that changes in the nominal money supply will only affect prices and not output. They argue that any short-run increase in output due to increased demand will be offset by the adaptive expectations of households and firms, who will adjust their behavior to the new inflation expectations. Therefore, sustained expected increases in the nominal money supply will only lead to sustained increases in prices, with no short-run increases in output.

According to New Classical Economists, Sustained Expected Increases in the Nominal