According to the aggregate demand and aggregate supply model, in the long run what is the impact of an increase in the money supply?
A) It lowers both the price level and real GDP.
B) It increases GDP, but it does not change the price level.
C) It increases the price level, but it does not change real GDP.
D) It increases both the price level and real GDP.

Question

Quizplus · Accepted Answer

According to the aggregate demand and aggregate supply model, in the long run, an increase in the money supply only affects the price level and not real GDP. This is because in the long run, wages and other input prices adjust to changes in the overall price level, leading to a decrease in production costs and an increase in output. However, this adjustment process does not affect the level of real GDP, which is determined by factors such as technology, capital, and labor. Therefore, an increase in the money supply only leads to an increase in the overall price level without affecting the level of real GDP.

According to the Aggregate Demand and Aggregate Supply Model, in the Long