The economy is in long-run equilibrium.Suppose that automatic teller machines become cheaper and more convenient to use,and as a result the demand for money falls.Other things equal,we would expect that,in the short run,
A) the price level and real GDP would rise,but in the long run they would both be unaffected.
B) the price level and real GDP would rise,but in the long run the price level would rise and real GDP would be unaffected.
C) the price level and real GDP would fall,but in the long run they would both be unaffected.
D) the price level and real GDP would fall,but in the long run the price level would fall and real GDP would be unaffected.

Question

Quizplus · Accepted Answer

Initially, the decrease in demand for money would cause a decrease in the interest rate, which would increase investment and aggregate demand. This would lead to an increase in both the price level and real GDP in the short run. However, in the long run, the increase in aggregate demand would lead to an increase in prices, but the level of real GDP would remain unaffected as it is determined by long-run factors such as technology, capital, and labor. Therefore, the price level would rise in the long run, but real GDP would be unaffected. Choice B correctly reflects this scenario.

The Economy Is in Long-Run Equilibrium