Suppose the economy is in long-run equilibrium at the level of potential output.What will be the long-run effect of an expansionary monetary policy?
A) a higher price level
B) a lower price level
C) a higher level of real output
D) a lower level of real output

Question

Suppose the economy is in long-run equilibrium at the level of potential output.What will be the long-run effect of an expansionary monetary policy?  
A) a higher price level 
B) a lower price level 
C) a higher level of real output 
D) a lower level of real output

Quizplus · Accepted Answer

In the long run, an expansionary monetary policy primarily leads to a higher price level due to inflationary pressures, without permanently affecting the real output, which tends to return to its potential level.

Suppose the Economy Is in Long-Run Equilibrium at the Level