If the money supply increases when there is much idle capacity in the economy,
A)most of the resulting rise in nominal GDP will be a result of price increases
B)most of the resulting rise in nominal GDP will be a result of increases in real output
C)most of the resulting rise in real GDP will be a result of increases in the price level
D)most of the resulting rise in real GDP will be a result of increases in the interest rate
E)only nominal GDP will change; real GDP will be unaffected

Question

Quizplus · Accepted Answer

When there is idle capacity in the economy, it means that there are unused resources, such as labor and capital, that can be utilized to produce more goods and services. If the money supply increases, it can stimulate demand and encourage businesses to use these idle resources to produce more output, leading to an increase in real GDP. However, if there is significant idle capacity, the increase in real output will likely outweigh any potential price increases, resulting in most of the resulting rise in nominal GDP being the result of increases in real output.

If the Money Supply Increases When There Is Much Idle