In general equilibrium, an increase in the money supply leads to

Question

Quizplus · Accepted Answer

In general equilibrium, an increase in the money supply shifts the aggregate demand curve to the right, leading to an increase in both output and prices. However, as prices rise, the demand for money also increases, leading to higher interest rates in the long run. Nonetheless, in the short run, interest rates may fall due to increased liquidity. Therefore, the correct answer is C, as a higher money supply leads to a higher price level in the economy.

In General Equilibrium, an Increase in the Money Supply Leads