If the money supply increases by 10%, in the long run:
A) unemployment drops by 10%.
B) the price level increases by 10%.
C) real GDP increases by 10%.
D) unemployment drops by 20%.

Question

Quizplus · Accepted Answer

In the long run, the relationship between the money supply and the price level is described by the quantity theory of money, which states that a change in the money supply will be directly proportional to a change in the price level. Specifically, if the money supply increases by 10%, then the price level will also increase by 10% in the long run. This occurs because with more money available, individuals and firms can bid up the prices of goods and services, leading to inflation. Changes in the money supply do not impact real GDP or unemployment in the long run.

If the Money Supply Increases by 10%, in the Long