When the money market is depicted in a diagram with the value of money on the vertical axis, which statement best describes the long-run effects of an increase in money supply?
A) The price level and the quantity of money demanded increases.
B) The price level increases, but the quantity of money demanded decreases.
C) The price level decreases, but the quantity of money demanded increases.
D) The price level and the quantity of money demanded decreases.

Question

Quizplus · Accepted Answer

In the long run, an increase in the money supply leads to a proportional increase in the price level due to inflation. As prices rise, the real value of money decreases, but the nominal quantity of money demanded increases because people need more money to conduct transactions at higher price levels. This is consistent with the Quantity Theory of Money.

When the Money Market Is Depicted in a Diagram with the Value