When people suffer from money illusion,an increase in the money supply:
A) raises real GDP in the short run.
B) lowers real GDP in the short run.
C) has no effect on real GDP in the short run but raises real GDP in the long run.
D) lowers real GDP in the long run.

Question

Quizplus · Accepted Answer

When people suffer from money illusion, they believe that an increase in the money supply increases their wealth even though the price level has increased. As a result, in the short run, they tend to spend more and increase the demand for goods and services, leading to an increase in real GDP. However, in the long run, prices will adjust and the money illusion will be corrected, leading to lower real GDP as the increase in the money supply leads to inflation.

When People Suffer from Money Illusion,an Increase in the Money