If the economy is at potential output and the Fed decreases 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, changes in the money supply are neutral with respect to real variables like real GDP. According to classical economic theory, in the long run, the economy returns to its potential output, and changes in the money supply only affect nominal variables like the price level.

If the Economy Is at Potential Output and the Fed