FIGURE 27-5
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-Refer to Figure 27-5. This economy begins in equilibrium with M S , M D and real GDP equal to potential
GDP with AD0 and AS0). Now suppose there is an increase in the money supply to $540 billion. In the long run, after all adjustments have taken place, what is the effect of the increase in the money supply?

Question

Quizplus · Accepted Answer

An increase in the money supply will cause the AD curve to shift rightward to AD1, causing an increase in both price level and real GDP. However, in the long run, the increase in real GDP will be only up to the potential level, which is $800 billion, due to the natural rate of unemployment. Therefore, the economy will reach a new equilibrium at point B with a higher price level of 104 and no change in real economic variables.

FIGURE 27-5 0 0