Suppose the economy is experiencing full employment.An unanticipated increase in the money supply will
A)raise real GDP and the price level in the short run,but in the long run will cause no change in real GDP and only a higher price level.
B)lower real GDP and the price level in the short run,but in the long run will cause no change in real GDP and only a lower price level.
C)cause no change in real GDP in either the short run or long run but will increase the price level.
D)cause the price level to rise in the short run but will increase real GDP in the long run.

Question

Quizplus · Accepted Answer

In the short run, an unanticipated increase in the money supply will result in increased spending, causing an increase in real GDP and the price level. However, this increase in the price level will eventually lead to an increase in production costs, causing firms to reduce production and return to the original level of output. Therefore, in the long run, the only result will be a higher price level, with no change in real GDP. This is known as the long-run neutrality of money.

Suppose the Economy Is Experiencing Full Employment