Question

In what ways is this conclusion modified by the extended classical model based on the misperceptions​ theory?

A. neither anticipated nor unanticipated monetary changes are neutral in the short run
B. unanticipated monetary changes are neutral in the short​ run, but anticipated monetary changes are not neutral in the short run
C. both anticipated and unanticipated monetary changes are neutral in the short run
D. anticipated monetary changes are neutral in the short​ run, but unanticipated monetary changes are not neutral in the short run

Answer 1

In the extended classical model based on the misperceptions theory, anticipated monetary changes are neutral in the short run, but unanticipated monetary changes can lead to changes in output or prices.

Step-by-step explanation:

In the extended classical model based on the misperceptions theory, the conclusion is D. anticipated monetary changes are neutral in the short run, but unanticipated monetary changes are not neutral in the short run.

This means that when individuals and firms correctly anticipate changes in monetary policy, those changes will have no effect on output or prices in the short run. However, when monetary changes are unanticipated, they can lead to changes in output or prices.

For example, if the central bank announces an expansionary monetary policy and individuals and firms expect this policy to stimulate the economy, they may increase their spending and investment. In this case, the anticipated monetary changes are neutral in the short run because they have no additional impact on output or prices. On the other hand, if the central bank unexpectedly implements an expansionary monetary policy, individuals and firms may be caught off guard and the unanticipated monetary changes can lead to changes in output or prices.