Question

Assume that the money supply in an economy operating at its full-employment level increases by 4%. Which of the following statements is true in the long run?

The real GDP in the economy will increase by 4%.
The price level in the economy will decrease by 4%.
The real GDP in the economy will remain the same.
The price level in the economy will remain the same.
The nominal GDP in the economy will increase by 0%.

Answer 1

In the long run, an increase in the money supply by 4% will result in an increase in the price level in the economy.

Step-by-step explanation:

In the long run, assuming full employment, an increase in the money supply by 4% will result in an increase in the price level in the economy.

This is due to the concept of inflationary pressure.

When the money supply increases, there is more money available in the economy, leading to increased demand, which in turn causes prices to rise.