Final answer:
In an economy, the quantity of money does affect the overall price level. An expansionary monetary policy increases the price level, but not output or unemployment. Changes in the money supply impact the interest rate, credit availability, and the cost of credit.
Step-by-step explanation:
In an economy, the quantity of money does affect the overall price level. According to the neoclassical view, an expansionary monetary policy increases the aggregate demand, leading to an inflationary increase in the price level.
However, this increase in the price level does not have a long-term impact on output or the unemployment rate.
Changes in the money supply can affect the interest rate, the availability of credit, and the overall price level. Expansion and contraction of the money supply also impact the cost of credit.
The quantity theory of money, which has been repeated throughout history, explains the relationship between the money supply and the overall price level.
Economists calculate the overall price level by computing a weighted average of the prices of goods and services people buy. Changes in the prices of goods that people spend a larger share of their incomes on matter more than changes in the prices of goods people spend a smaller share on.