787 "
© 2014 Pearson Canada Inc."- In the new classical model in Figure 27-4, the long-run effects of an anticipated increase in
aggregate demand that is less than expected ____.
A) increases output from Yn to Y 2 , and the inflation rate from P 1 to P 2
B) decreases output from Yn to Y 5 , and increases the inflation rate from P 1 to P 5
C) does not change output and increases the inflation rate from P 1 to P 3
D) does not affect the levels of real output or inflation
Answer: C
Diff: 3 Type: MC Page Ref: 697
Skill: Applied
Objective List: 25.1 Discern between activist and non-activists views on monetary policy
- Demonstrate graphically and explain the short-run and long-run effects of an unanticipated
monetary expansion in the new classical model.
Answer: See figure below.
In the new classical model, unexpected monetary expansion increases aggregate demand. Since
this is unexpected, aggregate supply is not affected, and output increases in the short run. As
expectations adjust, aggregate supply decreases and output returns to the natural rate, with only
the inflation rate rising.
Diff: 2 Type: SA Page Ref: 694
Skill: Recall
Objective List: 25.1 Discern between activist and non-activists views on monetary policy