FIGURE 27-4
-Refer to Figure 27-4.The economy begins in equilibrium at E₀.Now consider an expansion of the money supply.What is the long-run effect of this change?

Question

FIGURE 27-4 -Refer to Figure 27-4.The economy begins in equilibrium at E₀.Now consider an expansion of the money supply.What is the long-run effect of this change?

Quizplus · Accepted Answer

An expansion of the money supply leads to an increase in aggregate demand, which shifts the AD curve to the right. In the long run, this leads to an increase in the price level, but it does not have a significant effect on real GDP, as it is determined by factors such as technology, labor, and capital. Therefore, the economy will end up at a new equilibrium with a higher price level, but with the same level of real GDP as before.

FIGURE 27-4 -Refer to Figure 27-4.The Economy Begins in Equilibrium at E0.Now

FIGURE 27-4 -Refer to Figure 27-4.The Economy Begins in Equilibrium at E₀.Now