An increase in the money supply and inflation can only affect real variables only:
A)if households perceive it is happening.
B)if households do not perceive all of the inflation.
C)in the long run.
D)if households expect it.

Question

Quizplus · Accepted Answer

In the short term, if households do not fully perceive or anticipate inflation, it can temporarily affect real variables such as consumption, savings, and investment because people might misinterpret nominal changes for real changes. However, once households adjust their expectations, the real effects tend to dissipate, aligning with the classical dichotomy which posits that nominal variables do not affect real variables in the long run.

An Increase in the Money Supply and Inflation Can Only