Assuming an economy is initially at potential output, in the long run, an expansionary monetary policy is expected:

Question

Quizplus · Accepted Answer

Expansionary monetary policy is expected to increase output in the short run by lowering interest rates, which encourages borrowing and investment. However, in the long run, prices adjust to the increased money supply, neutralizing the real effects on output and bringing the economy back to its potential output. Thus, it does not affect output in the long run.

Assuming an Economy Is Initially at Potential Output, in the Long