In the long run, as potential GDP grows at a steady pace and nominal money supply is continuously increased over time
A)the level of output is essentially determined by shifts in the AS-curve
B)the level of output is essentially determined by shifts in the AD-curve
C)the price level will not change since the AS-curve is horizontal
D)real money balances continuously decrease as the AD-curve remains constant
E)the price level is determined solely by the shift in the AS-curve

Question

Quizplus · Accepted Answer

As potential GDP grows at a steady pace and nominal money supply is continuously increased over time, the AD-curve shifts to the right, but the AS-curve also shifts to the right due to growth in potential GDP. In the long run, the level of output is essentially determined by shifts in the AS-curve, since the economy will eventually adjust to its potential output level. This means that any increase in aggregate demand due to the growth in money supply will only lead to a temporary increase in output, which will eventually return to the potential level determined by the AS-curve. The price level may change in the short run due to shifts in the AD-curve or other factors, but in the long run it will be determined by the level of potential output determined by the AS-curve.

In the Long Run, as Potential GDP Grows at a Steady