The economy is in long-run equilibrium when an MP argues that the Bank of Canada should do more to fight unemployment. He argues that if the Bank of Canada increased the money supply faster, more workers would find jobs. How correct is the MP's argument?
A)true for both the long run and the short run
B)wrong for both the long run and the short run
C)true for the short run but not the long run
D)true for the long run but not the short run

Question

Quizplus · Accepted Answer

In the short run, an increase in the money supply could stimulate demand and hence employment. However, in the long run, prices will adjust to the increase in the money supply, and the economy will return to its natural rate of unemployment. Therefore, the MP's argument is only partially correct as it relates to the short run.

The Economy Is in Long-Run Equilibrium When an MP Argues