When an increase in the money supply is unexpected by firms and workers,real GDP:
A) increases in the short run.
B) decreases in the short run.
C) increases in the long run.
D) decreases in the long run.

Question

Quizplus · Accepted Answer

When the increase in the money supply is unexpected, firms and workers will increase their spending and investment as they perceive that they have additional buying power. This leads to an increase in demand for goods and services in the short run, which leads to an increase in real GDP. However, in the long run, the increase in the money supply will lead to inflation and a decrease in the value of money, which will lead to a decrease in real GDP.

When an Increase in the Money Supply Is Unexpected by Firms