In the new Keynesian approach, an increase in the nominal money supply
A)raises real balances in the short run but not in the long run.
B)raises real balances in the long run but not in the short run.
C)raises real balances in both the short and long runs.
D)does not raise real balances in either the short or long runs.

Question

Quizplus · Accepted Answer

In the new Keynesian approach, an increase in the nominal money supply leads to a temporary increase in real balances as prices adjust more slowly in the short run. However, in the long run, the increase in the money supply is fully reflected in higher prices, so real balances do not change. Therefore, choice A) is the best answer.

In the New Keynesian Approach, an Increase in the Nominal