In the long run, why do changes in the money supply affect only the price level?
A) because the aggregate demand curve is vertical
B) because the aggregate demand curve is downward sloping
C) because the long-run aggregate supply curve is vertical
D) because the long-run aggregate supply curve is upward sloping

Question

In the long run, why do changes in the money supply affect only the price level?  
A) because the aggregate demand curve is vertical 
B) because the aggregate demand curve is downward sloping 
C) because the long-run aggregate supply curve is vertical 
D) because the long-run aggregate supply curve is upward sloping

Quizplus · Accepted Answer

According to the classical dichotomy, changes in the supply of money affect only nominal variables in the long run. This is because the long-run aggregate supply curve is vertical, meaning that in the long run, changes in the supply of money do not affect real output, but only the overall price level. Thus, changes in the money supply in the long run only impact the level of prices and not aggregate output or employment.

In the Long Run, Why Do Changes in the Money