Multiple Choice
Which of the following is most likely to occur as a result of a decrease in the money supply in an economy?
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1. Introduction to Macroeconomics
Introduction to Economics
Multiple Choice
Which of the following can a country increase in the long run by increasing its money growth rate?
A
The natural rate of unemployment
B
The long-run real interest rate
C
The inflation rate
D
The real GDP growth rate
Verified step by step guidance1
Step 1: Understand the Quantity Theory of Money, which relates money growth to inflation in the long run. According to this theory, if the money supply grows faster than real output, the price level (and thus inflation) will increase proportionally.
Step 2: Recall that the natural rate of unemployment is determined by structural factors in the economy, such as labor market policies and technology, and is not affected by changes in the money growth rate in the long run.
Step 3: Recognize that the long-run real interest rate is determined by real factors like productivity and time preferences, and is not influenced by changes in the money growth rate, which primarily affects nominal variables.
Step 4: Understand that the real GDP growth rate depends on real factors such as capital accumulation, technological progress, and labor force growth, and is not directly affected by changes in the money growth rate in the long run.
Step 5: Conclude that increasing the money growth rate in the long run leads to a higher inflation rate, while real variables like natural unemployment, real interest rate, and real GDP growth remain unaffected.
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