Figure 7-3

-Employing Figure 7-3 above with equilibrium initially at E₀,assume the nominal money supply eased.If prices are flexible,in the short run ________ and in the long run ________.
A)prices and output rise as in E₂;output remains at 3000
B)prices and output remain at E₀;output changes to 2500
C)prices and output rise,E₀ to E₂;output returns to E₃
D)None of the above.

Question

Figure 7-3
 
-Employing Figure 7-3 above with equilibrium initially at E₀,assume the nominal money supply eased.If prices are flexible,in the short run ________ and in the long run ________.
A)prices and output rise as in E₂;output remains at 3000 
B)prices and output remain at E₀;output changes to 2500 
C)prices and output rise,E₀ to E₂;output returns to E₃ 
D)None of the above.

Quizplus · Accepted Answer

When the nominal money supply is increased and prices are flexible, in the short run, both prices and output rise due to increased demand (moving from E₀ to E₂). In the long run, as the economy adjusts and prices fully adapt, output returns to its natural level (E₃), while the price level remains higher than initially.

Figure 7-3 -Employing Figure 7-3 Above with Equilibrium Initially at E₀,assume the Initially