Assuming that the economy is in the long run equilibrium at full employment, a reduction in the money supply will cause a(n):
A) increase in the price level and an increase in real GDP.
B) reduction in the price level and an increase in real GDP.
C) increase in the price level and a reduction in real GDP.
D) none of the above

Question

Quizplus · Accepted Answer

In the long run, a reduction in the money supply will lead to a decrease in the price level, but real GDP will remain unchanged at full employment due to price and wage flexibility.

Assuming That the Economy Is in the Long Run Equilibrium