In the medium run, if government purchases are decreased and nominal money supply is increased, then we can expect that
A)aggregate demand will decrease and aggregate supply will increase, leaving the level of output the same
B)output, prices, and interest rates will all increase
C)output and prices will decrease, while interest rates will increase
D)interest rates will decrease, while output and prices may increase, decrease, or remain the same
E)none of the above

Question

Quizplus · Accepted Answer

Decreasing government purchases will decrease aggregate demand, while increasing nominal money supply will increase it. This will lead to a decrease in interest rates, but the effect on output and prices is ambiguous and depends on the relative magnitudes of the changes in demand and supply. Therefore, Choice D is the best option as it accounts for the change in interest rates and the ambiguous effect on output and prices.

In the Medium Run, If Government Purchases Are Decreased and Nominal