Suppose that neither output nor the money supply has been growing. In the new Keynesian view, if the Chairman of the Fed announces a 10% increase in the money supply and then takes actions that cause the money supply to grow by 10%, the result will be
A)a 10% increase in the price level and no change in output.
B)a 10% increase in the price level and an increase in output.
C)a less than 10% increase in the price level and an increase in output.
D)a less than 10% increase in the price level and no change in output.

Question

Quizplus · Accepted Answer

In the new Keynesian view, an increase in the money supply can lead to an increase in output in the short run due to price and wage stickiness, resulting in a less than proportional increase in the price level.

Suppose That Neither Output nor the Money Supply Has Been