Question

Consider the short run and the long run and then choose the statement that is correct.

A. In the short run, other things remaining the same, a given percentage change in the quantity of money brings an equal percentage change in the price level.
B. In the short run, money market equilibrium determines the price level.
C. The real interest rate is independent of the inflation rate in the long run.
D. The real interest rate is dependent on the price level in the long run

Answer 1

The correct statement is:

A. In the short run, other things remaining the same, a given percentage change in the quantity of money brings an equal percentage change in the price level.

Step-by-step explanation:

This economic situation is due to the market forces of demand and supply. Therefore, when the interest rate rises, if everything else remains equal, the opportunity cost of holding money rises. At the same time, the quantity of money demanded in the market decreases.