Suppose the Federal Reserve 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

In the long run, expansionary monetary policy only leads to an increase in the price level and no change in the output. This is due to the fact that the increase in money supply creates excess demand, which drives up prices but has no effect on the economy's productive capacity.

Suppose the Federal Reserve Implements Expansionary Monetary Policy Where the Money