Suppose the economy is in long-run equilibrium at the level of potential output. What will be the long-run effect of an expansionary monetary policy?
A) a higher price level
B) a higher level of real output
C) both a higher price level and a higher level of real output
D) a lower price level
E) a lower level of real output

Question

Quizplus · Accepted Answer

An expansionary monetary policy will increase the money supply and decrease interest rates, leading to an increase in aggregate demand in the short run. However, in the long run, the economy will return to its potential output level and the only effect will be an increase in the price level, as the quantity of goods and services supplied will not change.

Suppose the Economy Is in Long-Run Equilibrium at the Level