According to the aggregate demand and aggregate supply model, in the long run an increase in the money supply leads to
A)increases in both the price level and real GDP.
B)an increase in real GDP but does not change the price level.
C)an increase in the price level but does not change real GDP.
D)no change in either the price level or real GDP.

Question

Quizplus · Accepted Answer

In the long run, changes in the money supply only affect the price level, not real GDP. This is because in the long run, the economy adjusts to the new money supply, and prices adjust to bring the money market back into equilibrium. As prices increase, the real value of money decreases, causing an increase in the price level. Real GDP, however, is determined by factors such as technology, capital, and labor, and is not affected in the long run by changes in the money supply. Therefore, an increase in the money supply leads to an increase in the price level but does not change real GDP, making choice C the correct answer.

According to the Aggregate Demand and Aggregate Supply Model, in the Long