Suppose the economy is in long-run equilibrium at full employment levels of real GDP. In the long run, if the money supply increases, we would expect _____ in the price level and _____ in real GDP.

Question

Quizplus · Accepted Answer

According to the Quantity Theory of Money, an increase in the money supply will lead to a proportionate increase in the price level in the long run. However, in the long run, real GDP is determined by factors such as technological progress, labor force growth, and capital stock, and is not affected by changes in the money supply. Therefore, we would expect an increase in the price level but no change in real GDP.

Suppose the Economy Is in Long-Run Equilibrium at Full Employment