788 "
© 2014 Pearson Canada Inc."- Demonstrate graphically and explain the short-run and long-run effects of an anticipated
monetary expansion in the new classical model.
Answer: For anticipated policies, AS shifts with ADS, and real output does not change. The
only effect is to increase prices. The economy moves from point 1 to point 3.
Diff: 2 Type: SA Page Ref: 670
Skill: Applied
Objective List: 25.1 Discern between activist and non-activists views on monetary policy
- In the new classical model, show graphically and explain how an expected monetary
expansion that is less than expected reduces real output in the short run. What is the long-run
result?
Answer: See figure below.
Demand does not increase as much as expected, so aggregate supply decreases more than the
increase in aggregate demand. The result in the short run is a lower aggregate output. In the long-
run, AS adjusts to the actual increase in demand with higher inflation and no increase in output.
Diff: 2 Type: SA Page Ref: 697
Skill: Recall
Objective List: 25.1 Discern between activist and non-activists views on monetary policy