In the long run, changes in the money supply affect only the price level because
A) the aggregate demand curve is vertical.
B) the aggregate demand curve is downward sloping.
C) the long-run aggregate supply curve is vertical.
D) the long-run aggregate supply curve is upward sloping.
E) current real GDP is less than the economy's potential GDP.

Question

Quizplus · Accepted Answer

In the long run, changes in the money supply only affect the price level because the economy's output (represented by potential GDP) is determined by the factors of production (labor, capital, and technology) and the efficiency with which they are used. In the long run, the economy will always produce at its potential level of output, which is represented by the vertical long-run aggregate supply curve. Therefore, any changes in the money supply will only affect the price level and not output.

In the Long Run, Changes in the Money Supply Affect