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

Question

Quizplus · Accepted Answer

In the long run, an increase in the money supply by the Federal Reserve is neutral with respect to real GDP, according to the classical dichotomy. This means that changes in the money supply only affect nominal variables (like the price level) and have no effect on real variables (like real GDP), which will return to its potential output level.

If the Economy Is at Potential Output and the Fed