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

Quizplus · Accepted Answer

An expansion of the money supply will lead to an increase in aggregate demand, shifting the AD curve to the right. In the long run, the economy will adjust to a new equilibrium with a higher price level, but the same level of real GDP as before. This is known as the long-run vertical Phillips curve. Therefore, the correct answer is A) a higher price level.