Final answer:
In the neoclassical view, correctly anticipated inflation due to an expansionary monetary policy will lead to no change in real output, but an increase in the price level, as wages and prices adjust accordingly.
Step-by-step explanation:
If wages and prices are perfectly flexible and inflation is correctly anticipated, then an expansionary monetary policy will affect the real output and price level in the following way:
(A) Increase / Increase
(B) Increase / No Change
(C) No Change / Increase
(D) No Change / No Change
The correct answer according to the neoclassical view is (C) No Change / Increase.
When an expansionary monetary policy is enacted, it leads to a shift in the aggregate demand curve to the right, from AD to AD1. In the neoclassical model, if people anticipate the changes brought by this policy correctly, they will adjust their wages and prices accordingly. This means that workers will demand higher wages to match the anticipated increase in prices, and employers, expecting to receive higher prices for goods and services, will be willing to pay these higher wages. Consequently, the short-run aggregate supply curve will shift immediately, neutralizing any increase in real GDP. The result is a movement along the long-run aggregate supply curve, indicating no change in real output, but an increase in the price level.