New Classical Theory Asserts That, Because People Have Rational Expectations

question 14

Multiple Choice

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.

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