An increase in the growth rate of the money supply raises both real growth and inflation in the long run.

Question

Quizplus · Accepted Answer

This statement is a classical monetary theory, which states that an increase in the growth rate of the money supply will only lead to an increase in inflation, but not in real growth, in the long run. This is because the long-run aggregate supply (LRAS) curve is vertical, meaning that the economy's potential output is determined by its production factors (labor, capital, land, and technology), not by the money supply. Therefore, any increase in the money supply will only lead to a proportionate increase in prices, without affecting real output.

An Increase in the Growth Rate of the Money Supply