In the long-run model, a reduction in government purchases accompanied by an increase in the money supply

Question

Quizplus · Accepted Answer

In the long-run, GDP is determined by factors like technology and resources, not by fiscal or monetary policy, so a reduction in government purchases and an increase in the money supply have no effect on GDP (A). The increase in the money supply can lower interest rates, encouraging investment (C). The effect on the price level is ambiguous because the reduction in government purchases can lower it, while the increase in money supply can raise it (B). Therefore, all statements are correct.

In the Long-Run Model, a Reduction in Government Purchases Accompanied