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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

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BuyFindarrow_forward

Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

Explain both the short- and long-run movements of the new classical theory, assuming that expectations are formed rationally and policy is unanticipated.

To determine

The short-run and long-run movements of the new classical theory.

Explanation

As per the new classical theory, the economy is in the long-run equilibrium where the actual price level equals the expected price level. Suppose there is an increase in money supply by the monetary authority, then the aggregate demand would change, but the individuals unanticipated with this. Also, they do not expect any change in the price level. Due to this, there is an increase in real GDP in the short run...

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