Which of the following will cause the price level to increase in the long- run?
A) a decrease in government spending
B) an increase in income taxes
C) a decrease in the money supply
D) an increase in the interest rates

Question

Quizplus · Accepted Answer

A decrease in the money supply will cause a decrease in aggregate demand. As a result, there will be a decrease in the overall level of economic activity which will lead to a decrease in the price level. However, in the long run, the decrease in the money supply will lead to a decrease in the rate of inflation, which will result in a decrease in the nominal interest rate. This in turn will cause an increase in investment, which will increase aggregate demand and push up the price level.

Which of the Following Will Cause the Price Level to Increase