In the short run, an increase in the money supply will lead to a higher aggregate demand and a higher price level.

Question

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When the money supply increases, people have more money to spend, which leads to an increase in aggregate demand. This increase in demand can lead to an increase in prices in the short run, as firms may have limited capacity to increase production immediately to meet the higher demand. Thus, an increase in the money supply will lead to a higher aggregate demand and a higher price level in the short run.

In the Short Run, an Increase in the Money Supply