191k views
5 votes
In economies with persistently high inflation, an increase in the money supply will: not affect the real quantity of money, making money neutral in the long run.. O positively affect aggregate real output in the long run. O negatively affect the real quantity of money, as the aggregate price level increases by more than the money supply. O positively affect the real quantity of money in the long run.

User Ikes
by
8.3k points

1 Answer

1 vote

In economies with persistently high inflation, an increase in the money supply will negatively affect the real quantity of money, as the aggregate price level increases by more than the money supply. This is known as the long-run quantity theory of money and it suggests that in the long run, the quantity of money determines the price level of goods and services. According to this theory, an increase in the money supply will lead to a proportional increase in the price level of goods and services in the economy.In other words, if the money supply increases but the supply of goods and services remains constant, the prices of those goods and services will increase. This will lead to a decrease in the purchasing power of money, as each unit of money will be able to buy less than before. Therefore, an increase in the money supply will not affect the real quantity of money, making money neutral in the long run. The long-run effects of an increase in the money supply will be inflationary, leading to a rise in the price level of goods and services in the economy.

User IvanD
by
7.9k points