Suppose there is an increase in the money supply, but that people's demand for money balances increases by a greater amount at the same time. The net effect would be

Question

Quizplus · Accepted Answer

An increase in the money supply would normally lead to higher aggregate demand, but if people's demand for money balances also increases by a greater amount, this would lead to a reduction in aggregate demand. Assuming that there is no immediate effect on the price level (which could depend on other factors such as the degree of price stickiness), the long-run effect of a decrease in aggregate demand would be a lower price level.

Suppose There Is an Increase in the Money Supply, but That