Suppose that the economy is in long-run equilibrium and the government decided to engage in unexpected expansionary policy by increasing the money supply. If we assume rational expectations, which of the following statements is correct about the effect of expansionary policy in the long run?

Question

Quizplus · Accepted Answer

In the long run, with rational expectations, people anticipate the effects of monetary policy, so real variables like unemployment and real GDP remain unchanged, but the price level increases due to the increased money supply.

Suppose That the Economy Is in Long-Run Equilibrium and the Government