"A rise in government expenditures raised output in the short run, but left output unaffected in the long run." This statement implies that the price level __________ in the long run, causing the interest rate to __________.

Question

Quizplus · Accepted Answer

According to the theory of the long-run neutrality of money, an increase in government expenditures can boost output in the short run due to increased demand. However, in the long run, this effect dissipates as prices adjust upwards, leading to higher inflation. This inflation can prompt central banks to raise interest rates to control inflation, hence the price level rises, causing the interest rate to rise as well.

"A Rise in Government Expenditures Raised Output in the Short