Suppose that the economy is in long-run equilibrium at full employment levels of real GDP. In the long run, if the money supply increases, we would expect _____ in the price level and _____ in real GDP.
A) an increase; no change
B) an increase; an increase
C) a decrease; no change
D) no change; an increase

Question

Quizplus · Accepted Answer

In the long run, the economy will adjust to the increase in the money supply by increasing prices but keeping output at the full employment level. This is a result of the vertical nature of the long-run aggregate supply curve. Therefore, we expect an increase in the price level (inflation) but no change in real GDP.

Suppose That the Economy Is in Long-Run Equilibrium at Full