Starting from an initial long-run equilibrium, an unanticipated shift to a more expansionary monetary policy would tend to increase
A) prices and unemployment in the long run.
B) real output in the short run but not in the long run.
C) real output in the long run but not in the short run.
D) real output in both the long run and the short run.

Question

Quizplus · Accepted Answer

In the short run, an unanticipated shift to a more expansionary monetary policy would reduce interest rates and increase aggregate demand, resulting in an increase in real output. However, in the long run, prices would adjust to the increased demand, leading to an increase in inflation and a decrease in real output. Unemployment would not be affected in the long run as it would return to its natural rate.

Starting from an Initial Long-Run Equilibrium, an Unanticipated Shift to a More