New classical theory asserts that, because people have rational expectations, if a policy of reducing the money supply is used
A) it might affect both aggregate demand and potential real GDP.
B) consumers and firms observe that the money supply has fallen, anticipate the eventual reduction in the price level, and adjust their expectations accordingly.
C) market participants react in such a way that shifts in aggregate supply will reinforce shifts in aggregate demand and real GDP will shift inevitably into inflationary or recessionary gaps.
D) All of the above are true.

Question

Quizplus · Accepted Answer

New classical theory suggests that people have rational expectations, so they anticipate changes in policy and adjust their behavior accordingly, such as expecting a reduction in the price level when the money supply is reduced.

New Classical Theory Asserts That, Because People Have Rational Expectations