If the short-run aggregate supply curve is horizontal,then a change in the money supply will change ______ in the short run and change ______ in the long run.
A) only prices; only output
B) only output; only prices
C) both prices and output; only prices
D) both prices and output; both prices and output

Question

Quizplus · Accepted Answer

If the short-run aggregate supply curve is horizontal, it means that the economy is operating at full capacity, and any increase in demand can only increase output without affecting the price level. Therefore, a change in the money supply will only affect output in the short run, but not prices. However, in the long run, the production capacity of the economy will increase, causing the short-run aggregate supply curve to shift to the right, and the general price level will adjust accordingly. Thus, the long-run effect will only be on prices, but not on output.

If the Short-Run Aggregate Supply Curve Is Horizontal,then a Change