According to Phelps and Friedman, in the short run, what effect does an increase in the money supply have on prices and unemployment?
A)It raises prices and unemployment.
B)It raises prices and reduces unemployment.
C)It reduces prices and raises unemployment.
D)It reduces prices and unemployment.

Question

Quizplus · Accepted Answer

In the short run, an increase in the money supply leads to lower interest rates and a rise in spending, which increases demand for goods and services. This leads to a rise in prices (inflation), but also an increase in output and employment, reducing unemployment. Therefore, the correct option is B, which states that an increase in the money supply raises prices and reduces unemployment.

According to Phelps and Friedman, in the Short Run, What