Question

The economy is in long run equilibrium. Suppose that automatic teller machine become cheaper and more convenient to use, and as a result the demand for money falls. Other think equal, would expect that in the short run

The price level and real GDP would rise, but the long run they would both be unaffected
The price level and real GDP would rise but in the long run the price level would rise a real GDP would be unaffected.
The price level and real GDP would fall, but in the long run they would both be unaffected
The price level and real GDP would fall, but in the long run the price level would fall a real GDP would be unaffected

Answer 1

Answer: The price level and real GDP would rise but in the long run the price level would rise and real GDP would be unaffected.

Step-by-step explanation:

The Economy is in a long run Equilibrium and the increased convince of using an ATM leads to a fall in the demand for money.

Other things held equal this will result in a fall in interest rates as the Money Demand Curve shifts to the left. This will increase Investment Demand because interest rates are now lower and so people can borrow more.

The effect of this is that Aggregate Demand will increase and SHIFT RIGHTWARD this increasing both price level and real GDP in that Short Run.

In the Long Run, the Economy will reduce the Short Run Aggregate Supply therefore going back to produce Long Run Real GDP once more. This change in the Shirt Run Aggregate Supply curve will lead to a further RISE in the Long Run price while Real GDP remains UNAFFECTED.

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