An unexpected increase in money growth leads to increased inflation in:
A) the short run only.
B) the long run only.
C) both the short run and the long run.
D) neither the short run nor the long run.

Question

Quizplus · Accepted Answer

An unexpected increase in money growth, in the short run, leads to an increase in aggregate demand and a corresponding increase in prices, leading to inflation. In the long run, inflation expectations adjust, leading to higher nominal wages, and pushing up costs for firms, resulting in higher prices and inflation. Hence, an unexpected increase in money growth leads to increased inflation in both the short run and the long run.

An Unexpected Increase in Money Growth Leads to Increased Inflation