In the long run, an increase in the quantity of money:
A) increases real output.
B) increases prices but not long-run output.
C) increases real interest rates.
D) has no effect on the economy.

Question

Quizplus · Accepted Answer

In the long run, an increase in the quantity of money leads to inflation, but it does not increase real output. This is because the increase in money supply causes an increase in aggregate demand, leading to higher prices, but it does not increase the economy's capacity to produce goods and services. Real output is determined by factors such as technology, capital, and labor, which cannot be increased by simply increasing the money supply. Therefore, while an increase in the quantity of money may have short-term effects on output and employment, in the long run, the only effect is inflation.

In the Long Run, an Increase in the Quantity of Money