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Author Question: Like the monetarists, new classical economists favor a. money growth aimed at achieving a nominal ... (Read 45 times)

ghost!

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on: Jun 30, 2018
Like the monetarists, new classical economists favor
 
  a. money growth aimed at achieving a nominal GDP target.
  b. discretionary policy action.
  c. a money growth rate that stabilizes output.
  d. a money growth rule that guides monetary policy.

Question 2

How might inflation, even if fully anticipated, prevent the classical dichotomy from holding, even in the long run?
 
  What will be an ideal response?


abro1885

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Reply #1 on: Jun 30, 2018
Answer to Question 1

D

Answer to Question 2

The classical dichotomy asserts that output is determined solely by the aggregate production function and the quantities of factors available. Inflation is like a negative technology shock that lowers productivity. Shoe-leather and menu costs represent uses of resources that add nothing to aggregate output. Because price increases throughout the economy are spread out over time, it is rational to react to the temporary changes in relative prices, even if the changes are known to be temporary. This causes distortions in the allocation of resources, and temporary, rational distortions are distortions, nonetheless.


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