In the short run, when the central bank increases the quantity of money, what happens to real balances?
A) They do not change, since prices will rise by the same proportion.
B) They will fall, since prices will rise by a greater proportion.
C) They will rise, since prices overall will fall.
D) They will rise, since prices will not change in the short run.

Question

Quizplus · Accepted Answer

In the short run, prices are relatively sticky, so they do not change immediately in response to an increase in the quantity of money. Therefore, when the central bank increases the quantity of money, real balances (the purchasing power of money) will increase, since prices will not change in the short run.

In the Short Run, When the Central Bank Increases the Quantity