If a country was operating well below its long-run capacity (potential GDP), the initial impact of an unanticipated increase in the money supply would most likely result in an increase in
A) prices with little change in output.
B) output with little change in prices.
C) output and a decline in prices.
D) prices and a decline in output.

Question

Quizplus · Accepted Answer

If a country is operating below its long-run capacity, it means there is spare capacity in the economy that can be utilized to produce more output. An unanticipated increase in the money supply can fuel demand and stimulate economic activity, leading to an increase in output without significant inflationary pressures. Therefore, option B, an increase in output with little change in prices, is the most likely result.

If a Country Was Operating Well Below Its Long-Run Capacity