If the economy is at potential output and the Bank of Canada increases the money supply,in the long run the price level will likely increase.

Question

Quizplus · Accepted Answer

When the economy is at potential output, any increase in the money supply will create an excess of demand over supply in the market, leading to an increase in prices in the long run. This is because as there is more money in circulation, people will spend more, causing businesses to increase prices to match the higher demand. Therefore, increasing the money supply when the economy is at potential output can lead to inflationary pressures.

If the Economy Is at Potential Output and the Bank