Under a system of flexible exchange rates, monetary expansion is entirely neutral in the long run.In other words, the long-run effect of monetary expansion is that
A)nominal money supply, prices, and the nominal exchange rate all increase proportionally
B)real money balances are not affected
C)relative prices, including the real exchange rate, are not affected
D)real output and the level of unemployment are not affected
E)all of the above

Question

Quizplus · Accepted Answer

Under a system of flexible exchange rates, in the long run, monetary expansion leads to proportional increases in the nominal money supply, prices, and the nominal exchange rate, leaving real money balances, relative prices including the real exchange rate, and real output and unemployment levels unaffected. This is consistent with the classical dichotomy and the neutrality of money in the long run.

Under a System of Flexible Exchange Rates, Monetary Expansion Is