In the new classical view, whether changes in the nominal money supply affect output in the short run depends on whether
A)the changes are expected or unexpected.
B)prices are flexible or inflexible.
C)the nominal interest rate is affected by changes in the money supply.
D)the Fed reacts passively or actively to the onset of recessions.

Question

Quizplus · Accepted Answer

In the new classical view, changes in the nominal money supply only affect output in the short run if they are unexpected. Expected changes in the money supply will influence nominal variables, such as prices, but will not have a real effect on output or employment because economic agents will anticipate them and incorporate them into their expectations. Only unexpected changes in the money supply can alter output and employment by causing temporary changes in relative prices and inducing firms to alter their production decisions.

In the New Classical View, Whether Changes in the Nominal