According to real business cycle theory, if the Bank of Canada increases the quantity of money when real GDP decreases, real GDP
A)will increase but only temporarily.
B)and the price level will both be unaffected.
C)will increase permanently.
D)will be unaffected, but the price level will rise.
E)will decrease due to the inefficiencies introduced into production as a result.

Question

Quizplus · Accepted Answer

Real business cycle theory suggests that changes in the money supply do not affect real variables like real GDP in the long run. Instead, such changes primarily affect nominal variables like the price level. Therefore, if the Bank of Canada increases the quantity of money, it would not affect real GDP according to this theory, but it would lead to an increase in the price level due to inflation.

According to Real Business Cycle Theory, If the Bank of Canada