According to Phelps and Friedman, in the short run, what effect does an increase in the money supply have on prices and unemployment?
A) It raises prices and unemployment.
B) It raises prices and reduces unemployment.
C) It reduces prices and raises unemployment.
D) It reduces prices and leaves unemployment unchanged.

Question

Quizplus · Accepted Answer

According to Phelps and Friedman, in the short run an increase in the money supply leads to higher spending, which in turn leads to an increase in output and a reduction in unemployment. However, this increase in spending also leads to higher prices, as demand outstrips supply. Therefore, in the short run, an increase in the money supply raises prices and reduces unemployment.

According to Phelps and Friedman, in the Short Run, What