An expected change in the money supply will result in a greater shift in the short-run aggregate supply curve in the new classical approach than in the new Keynesian approach because
A)households and businesses have rational expectations in the new classical approach but not in the new Keynesian approach.
B)households and businesses have rational expectations in the new Keynesian approach but not in the new classical approach.
C)prices are perfectly flexible in the new Keynesian approach, whereas prices are sticky in the new classical approach.
D)prices are perfectly flexible in the new classical approach, whereas prices are sticky in the new Keynesian approach.

Question

Quizplus · Accepted Answer

The new classical approach assumes that prices are perfectly flexible, meaning that they can adjust quickly to changes in the money supply. Therefore, any expected change in the money supply will result in a large shift in the short-run aggregate supply curve. On the other hand, the new Keynesian approach assumes that prices are sticky, meaning that they do not adjust quickly. Therefore, an expected change in the money supply will result in a smaller shift in the short-run aggregate supply curve.

An Expected Change in the Money Supply Will Result in a Greater