Which is true concerning the effect of an increase in the money supply compared to general equilibrium?
A)Though it may increase GDP in the short run, its primary effect in general equilibrium is a higher price level.
B)Though it may increase inflation in the short run, its primary effect in general equilibrium is higher GDP.
C)Both GDP and the price level are likely to rise both in the short run and in general equilibrium.
D)Neither GDP nor the price level is likely to be affected in the general equilibrium.

Question

Quizplus · Accepted Answer

In general equilibrium, the increase in the money supply will lead to an increase in the aggregate demand for goods and services, which will lead to an increase in both the price level and output level in the short run. However, in the long run, the increase in the money supply will lead to an increase in the price level but not necessarily an increase in the output level. This is because the increase in the money supply will eventually lead to an increase in the nominal wages and prices, which will lead to a decrease in the real wage and prices, resulting in a decrease in the aggregate supply of goods and services. Therefore, option A is the correct answer as it correctly describes the impact of a money supply increase on the general equilibrium.

Which Is True Concerning the Effect of an Increase in the Money