The aggregate demand-aggregate supply framework indicates that the long-run effect of a ________ in the money supply is an increase in ________, everything else held constant.
A) fall; aggregate output
B) fall; the inflation rate
C) rise; aggregate output
D) rise; the inflation rate

Question

Quizplus · Accepted Answer

According to the aggregate demand-aggregate supply framework, an increase in the money supply causes an increase in aggregate demand, which leads to an increase in the price level (inflation) in the short run. However, in the long run, prices adjust to the increase in aggregate demand, resulting in a higher level of output but with no change in the price level. Therefore, the long-run effect of an increase in the money supply is an increase in the inflation rate.

The Aggregate Demand-Aggregate Supply Framework Indicates That the Long-Run Effect