Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines) and no action is taken by the government:
A) prices will rise in both the short run and the long run.
B) output will rise in both the short run and the long run.
C) prices will rise in the short run and output will rise in the long run.
D) output will rise in the short run and prices will rise in the long run.

Question

Quizplus · Accepted Answer

Starting from long-run equilibrium, if the velocity of money increases, it means that the same amount of money is now being spent more frequently, resulting in an increase in aggregate demand. In the short run, with prices sticky, there will be an increase in output as firms increase production to meet the higher demand. However, as the economy moves toward the new long-run equilibrium, prices will eventually adjust and rise as well. Therefore, output will rise in the short run and prices will rise in the long run. There is no reason to believe that the government would necessarily take any action in this scenario.

Starting from Long-Run Equilibrium, If the Velocity of Money Increases