Assuming that the economy is in the long run equilibrium at full employment, an increase in the money supply will cause a:
A) proportional increase in the price level and no change in real GDP.
B) proportional reduction in the price level and an increase in real GDP.
C) proportional increase in the price level and an increase in real GDP.
D) proportional increase in the price level and a reduction in real GDP.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, an increase in the money supply will lead to an increase in aggregate demand. However, in the long run, the economy is at full employment and therefore any increase in aggregate demand will only result in an increase in the price level, with no change in real GDP. Therefore, the best choice is A.

Assuming That the Economy Is in the Long Run Equilibrium