Suppose the central bank implements expansionary monetary policy where the money supply increases. Which of the following will tend to occur in the long run as a result of this monetary policy action?
A) Output and the price level will both increase.
B) Output will increase with no change in the price level.
C) an increase in the price level and no change in output
D) no change in either the price level or output

Question

Quizplus · Accepted Answer

According to the quantity theory of money, in the long run, an increase in the money supply leads to a proportional increase in the price level, while the output remains constant. Therefore, option C is the best choice. Options A and B are incorrect because output cannot increase in the long run unless there is a corresponding increase in resources or productivity. Option D is incorrect because the increase in the money supply will eventually lead to an increase in the price level.

Suppose the Central Bank Implements Expansionary Monetary Policy Where the Money