According to the New Classical economists, with rational expectations, an increase in the money supply will
A) lead only to an increase in prices in both the short run and the long run.
B) lead to an increase in the equilibrium level of income in the short run but to no change In the equilibrium level of income in the long run.
C) lead to a fall in prices but to no change in money wages.
D) lead to a rightward shift in the long-run aggregate supply curve.

Question

Quizplus · Accepted Answer

New Classical economists argue that with rational expectations, individuals will anticipate the effects of monetary policy changes. Therefore, an increase in the money supply will be expected to lead only to an increase in prices, without affecting real variables like the equilibrium level of income in both the short run and the long run.

According to the New Classical Economists, with Rational Expectations, an Increase