Question

Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is less than the quantity of money demanded at the initial equilibrium. This expansion in the money supply will people's demand for goods and services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services will and the value of money will:

Answer 1

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Step-by-step explanation:

It is stated that the quantity of money supplied is lower than the quantity of money demanded. This is NOT an expansion in monetary policy as the question states but a contraction. Expansionary monetary policy occurs when the government increases money supply in the economy.

The quantity of money supplied is lower than the quantity of money demanded. The reduction in money supply will lower people's demand for goods and services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services will fall, and value of money will rise.

Since there is a confusion in the question, I will also explain what happens when there is an expansionary monetary policy:

The quantity of money supplied is higher than the quantity of money demanded. This increase in money supply will raise people's demand for for goods and services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services will rise and the value of money will fall.