The economy is in long-run equilibrium. Suppose that automatic teller machines become cheaper and more convenient to use, and as a result the demand for money falls. Other things being equal, what would we expect will happen to the price level and real GDP in the short and long run?
A) In the short run, the price level and real GDP would rise, but in the long run they would both be unaffected.
B) In the short run, the price level and real GDP would rise, but in the long run the price level would rise and real GDP would be unaffected.
C) In the short run, the price level and real GDP would fall, but in the long run they would both be unaffected.
D) In the short run, the price level and real GDP would fall, but in the long run the price level would fall and real GDP would be unaffected.

Question

Quizplus · Accepted Answer

In the short run, a decrease in money demand lowers interest rates, stimulating investment and consumption, which increases real GDP and the price level. In the long run, real GDP returns to its natural level, but the price level remains higher due to increased aggregate demand.

The Economy Is in Long-Run Equilibrium