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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?

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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 1 year ago
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