An increase in the money supply will cause:
A) output to increase in the short- run and return to the potential output in the long run.
B) output to decrease in the long run and return to potential output in the long run.
C) output to increase in the long run and in the short run.
D) output to decrease in the long run and in the short run.

Question

Quizplus · Accepted Answer

An increase in the money supply can lead to an increase in aggregate demand, which can lead to an increase in output in the short run. However, in the long run, as prices adjust to the increase in money supply, production costs rise, and output returns to potential output. This is known as the short-run versus long-run trade-off of monetary policy. Therefore, option A is the best choice.

An Increase in the Money Supply Will Cause