As a result of an increase in the growth rate of money supply,
A) real GDP growth rate increases only in the short run, and the inflation rate increases in both the short run and the long run.
B) real GDP growth rate increases only in the long run, and the inflation rate increases only in the short run.
C) real GDP growth rate increases in both the short run and the long run, and the inflation rate increases only in the short run.
D) both the real growth rate and the inflation rate increase only in the short run.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, an increase in the growth rate of money supply will lead to an increase in the price level and inflation rate in the long run. However, in the short run, an increase in the money supply can stimulate spending and increase aggregate demand, leading to an increase in real GDP, but this effect is only temporary. Therefore, in the long run, the economy will reach a new equilibrium at a higher price level, but with no change in real GDP growth rate. Therefore, option A is the correct choice.

As a Result of an Increase in the Growth Rate