Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then ______ increase(s) in the short run and ______ increase(s) in the long run.
A) prices; output
B) output; prices
C) output; output
D) prices; prices

Question

Quizplus · Accepted Answer

If the Federal Reserve increases the money supply, it will lead to a decrease in interest rates which will stimulate investment and consumer spending resulting in an increase in output in the short run. However, in the long run, the increase in the money supply will lead to inflation which will result in an increase in prices. Therefore, the correct choice is B since output increases in the short run and prices increase in the long run.

Assume That the Economy Starts from Long-Run Equilibrium