-In the new classical model in the figure above, the long-run effect of an unanticipated monetary contraction ________. A) increases output from Y_n to Y₂, and the inflation rate from P₁ to P₂ B) decreases output from Y_n to Y₄, and the inflation rate from P₃ to P₄ C) does not change output and increases the inflation rate from P₁ to P₃ D) does not change output and decreases the inflation rate from P₃ to P₁

Question

Quizplus · Accepted Answer

In the new classical model, the long-run effect of an unanticipated monetary contraction does not change the output due to the economy's return to its natural level of output, but it decreases the inflation rate as the money supply is reduced.

-In the New Classical Model in the Figure Above, the Long-Run