Suppose the economy is at full employment. An increase in the money supply will _______ in the short run and _______ in the long run.
A) increase interest rates, increase the price level
B) decrease interest rates, increase the price level
C) decrease interest rates, decrease the price level
D) increase interest rate, have no effect on the price level.

Question

Quizplus · Accepted Answer

At full employment, an increase in the money supply will decrease interest rates in the short run as there will be more money for borrowing, leading to increased spending and investment. In the long run, however, the increase in demand will lead to higher prices as businesses raise their prices due to the increased demand. Therefore, in the long run, an increase in the money supply will increase the price level.

Suppose the Economy Is at Full Employment