Figure 7-3
-Employing Figure above with equilibrium initially at E0, assume the nominal money supply eased. If prices are flexible, in the short run ________ and in the long run ________.
A) prices and output rise as in E2; output remains at 3000
B) prices and output remain at E0; output changes to 2500
C) prices and output rise, E0 to E2; output returns to E3
D) None of the above.

Question

Figure 7-3 
-Employing Figure above with equilibrium initially at E0, assume the nominal money supply eased. If prices are flexible, in the short run ________ and in the long run ________.
A) prices and output rise as in E2; output remains at 3000 
B) prices and output remain at E0; output changes to 2500 
C) prices and output rise, E0 to E2; output returns to E3 
D) None of the above.

Quizplus · Accepted Answer

In the short run, an increase in the nominal money supply leads to higher prices and output, shifting equilibrium from E0 to E2. In the long run, output returns to its natural level at E3 as prices fully adjust.

Figure 7-3 -Employing Figure Above with Equilibrium Initially at E0, Assume the E0