Question

In: Economics

what will happen to price level and Real GDP in the long run if the money...

what will happen to price level and Real GDP in the long run if the money supply increases?

Solutions

Expert Solution

If money supply increses in the long run, it will lead to increase spending of consumers which will shift Aggregate Demand curve towards right which will increase the prices in the economy. If we see on the basis of quantity theory of money, double the increase in money supply will leads to double the price levels. If the increase in money supply is for short run than both the prices and Real GDP will increase but in long run only prices will increase with no effect on Real GDP. Money is considered to be neutral in long run as it have no real affects in GDP and thus, Real GDP remains constant in long run.

Rahul Sunny answered 2 years ago
Next > < Previous

Related Solutions

a.Consumer confidence increases. What is the level of real GDP in long run? b.When the price...
a.Consumer confidence increases. What is the level of real GDP in long run? b.When the price level rises, what happens to firms’ profit in short run?
Using the AD AS model, explain what will happen to the price level and real GDP...
Using the AD AS model, explain what will happen to the price level and real GDP if either the SRAS or AD curve shifts. You are told that 2 events take place and you must explain which curve shifts and in what direction.
(A) (B) (C) Price Level Real GDP Price Level Real GDP Price Level Real GDP 110...
(A) (B) (C) Price Level Real GDP Price Level Real GDP Price Level Real GDP 110 290 100 215 110 240 100 265 100 240 100 240 95 240 100 265 95 240 90 215 100 290 90 240 a. Which set of data illustrates aggregate supply in the immediate short-run in North Vaudeville?      The data in (Click to select)CAB.      Which set of data illustrates aggregate supply in the short run in North Vaudeville?      The data in...
What determines the equilibrium price level and real GDP? In the short run, a shift in...
What determines the equilibrium price level and real GDP? In the short run, a shift in aggregate demand establishes a new, but temporary, equilibrium along the short-run aggregate supply curve. TRUE or FALSE? Please Explain your Answer. In the long run, the short-run aggregate supply curves shifts so that changes in aggregate demand determine the price level but not the equilibrium level of output or real GDP. TRUE or FALSE? Please explain your answer. Propose three functions of the Federal...
What will happen in the long run if companies are losing money in the short run?...
What will happen in the long run if companies are losing money in the short run? a. Companies will leave the marketplace, the market supply will shift to the left, and the price will rise until there is zero economic profit for the remaining companies. b. Companies will stay in the marketplace, the market supply and demand will be unaffected, and quantity supplied will drop. c. Companies will leave the marketplace, the market demand will decrease, and the price will...
Velocity. a) The money supply is $600. The price level is 2 and Real GDP is...
Velocity. a) The money supply is $600. The price level is 2 and Real GDP is 900. What is velocity? b) The money supply grows 3%, velocity is growing 1%, real output is growing 2%. What is the inflation rate? Suppose that people are worried that future inflation will be very high, so that people don’t want to hold onto money since it will lose value, which makes velocity grow at a rate of 10%. If the money supply continues...
Velocity.    a) The money supply is $600. The price level is 2 and Real GDP is...
Velocity.    a) The money supply is $600. The price level is 2 and Real GDP is 900. What is velocity?   b) The money supply grows 3%, velocity is growing 1%, real output is growing 2%. What is the inflation rate? Suppose that people are worried that future inflation will be very high, so that people don’t want to hold onto money since it will lose value, which makes velocity grow at a rate of 10%. If the money supply continues...
Using the following data money supply=150, nominal GDP=2500, real GDP=2000 a) What is the price level...
Using the following data money supply=150, nominal GDP=2500, real GDP=2000 a) What is the price level in the economy b) Calculate the velocity of money
Assume that Canada is initially in long run equilibrium with price level of P1 and GDP...
Assume that Canada is initially in long run equilibrium with price level of P1 and GDP of Y1. Discuss how each of the following four events would affect aggregate demand, the price level and real GDP of Canada. i. There is a sharp fall in Canada’s exchange rate ii. A wave of pro-Canadian sentiment sweeps the U.S. and people in U.S. increase their consumption of Canadian goods iii. There is a recession in China, which is a large importer of...
Assume that Canada is initially in long run equilibrium with price level of P1 and GDP...
Assume that Canada is initially in long run equilibrium with price level of P1 and GDP of Y1. Discuss how each of the following four events would affect aggregate demand, the price level and real GDP of Canada (mentioning how net exports are impacted) a. There is a sharp fall in Canada’s exchange rate b. A wave of pro-Canadian sentiment sweeps the U.S. and people in U.S. increase their consumption of Canadian goods c. There is a recession in China,...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT