Question

In the AD-AS model with a long-run potential growth rate of 2%, a 6 percentage point increase in the money supply growth rate will cause the economy's growth rate to be _____ in the long run.

A) 2%
B) 4%
C) 6%
D) 8%

Answer 1

In the long run, the economy's growth rate will remain at its potential growth rate of 2%, despite a 6 percentage point increase in the money supply growth rate, according to the AD-AS model.

Step-by-step explanation:

In the AD-AS model, long-run economic growth is determined by factors such as productivity, physical and human capital, and technological advancements. Despite changes in the money supply, the long-run economic growth rate is typically consistent with these fundamental factors. Assuming the underlying real factors of the economy do not change, an increase in the money supply growth rate will not alter the long-run economic growth rate.

Therefore, even with a 6 percentage point increase in the money supply growth rate, the economy's long-run growth rate will remain at its potential growth rate of 2% because money is neutral in the long run and does not affect real variables like the growth rate of the economy.

The correct answer to the question is: A) 2%.