Suppose the economy is at full employment. An increase in the money supply will _______ in the short run and _______ in the long run.

Question

Quizplus · Accepted Answer

At full employment, an increase in the money supply will lead to an increase in aggregate demand. In the short run, this will lead to an increase in investment due to the increased demand for goods and services. However, in the long run, prices and wages will adjust, and the economy will return to its full-employment equilibrium level of output. Therefore, the level of investment will remain unchanged in the long run. Option B is the correct choice because it reflects the short-run increase in investment but acknowledges that investment will not change in the long run.

Suppose the Economy Is at Full Employment