In the new classical model,an unanticipated increase in the money supply causes
A)aggregate demand increases along a stationary aggregate supply curve.
B)both aggregate demand and supply increase.
C)aggregate demand increases as aggregate supply decreases.
D)both aggregate demand and supply decrease.

Question

Quizplus · Accepted Answer

In the new classical model, prices are flexible and adjust quickly to changes in the money supply. As a result, an unanticipated increase in the money supply will only temporarily increase output and employment, as prices will rise to reflect the increase in the money supply. This means that in the long run, the aggregate supply curve is stationary. However, in the short run, the increase in the money supply will lead to an increase in aggregate demand, as consumers and firms have more money to spend. Therefore, the correct answer is that an unanticipated increase in the money supply causes aggregate demand increases along a stationary aggregate supply curve (A).

In the New Classical Model,an Unanticipated Increase in the Money