In the long run, an increase in the quantity of money, other things remaining the same,
A) increases the price level.
B) decreases the price level.
C) increases real GDP.
D) decreases real GDP.
E) has no effect on the price level or real GDP.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, an increase in the quantity of money leads to an increase in the price level, other things remaining the same. This is because an increase in the quantity of money leads to an increase in nominal aggregate demand, which, in the short run, leads to an increase in both real GDP and the price level. However, in the long run, the economy adjusts and the increase in nominal aggregate demand is reflected in a proportional increase in the price level, with no effect on real GDP.

In the Long Run, an Increase in the Quantity of Money