If the economy is at potential output and the Fed increases the money supply, in the long run the price level will likely:
A) fluctuate randomly.
B) remain the same.
C) decrease.
D) increase.

Question

Quizplus · Accepted Answer

If the economy is at potential output, an increase in the money supply will lead to an increase in the aggregate demand. As the production cannot be increased beyond potential output in the long run, the increase in demand will lead to an increase in the overall price level. Therefore, the correct answer is D.

If the Economy Is at Potential Output and the Fed