As a result of an increase in the growth rate of the money supply:
A) real GDP growth increases only in the short run,and the inflation rate increases in both the short run and the long run.
B) real GDP growth increases only in the long run,and the inflation rate increases only in the short run.
C) real GDP growth increases in both the short run and the long run,and the inflation rate increases only in the short run.
D) both the real growth and the inflation rate increase only in the short run.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, an increase in the growth rate of the money supply leads to an increase in the price level in the long run, but in the short run, it leads to an increase in real GDP due to increased spending. This is known as the short-run Phillips curve. However, in the long run, the increase in the money supply leads to an increase in the price level, causing inflation. Hence, real GDP growth increases only in the short run, and the inflation rate increases in both the short run and the long run.

As a Result of an Increase in the Growth Rate