Suppose that the economy is in long-run equilibrium and the government decided to engage in expected expansionary policy by increasing the money supply. If we assume rational expectations, which of the following statements is correct about the effect of expansionary policy in the long run?

Question

Quizplus · Accepted Answer

Under rational expectations, individuals anticipate the effects of monetary policy. In the long run, an increase in the money supply is expected to raise the price level without affecting real GDP or the unemployment rate, according to the classical dichotomy and the natural rate hypothesis.

Suppose That the Economy Is in Long-Run Equilibrium and the Government