Multiple Choice
Which of the following actions would a central bank most likely take to decrease the money supply?
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1. Introduction to Macroeconomics
Introduction to Economics
Multiple Choice
In the context of macroeconomics, an increase in the money supply would lead to which of the following outcomes in the long run?
A
A permanent increase in real GDP
B
A decrease in the unemployment rate below its natural level
C
A higher price level with no change in real output
D
A lower interest rate in the long run
Verified step by step guidance1
Step 1: Understand the classical dichotomy and the neutrality of money in the long run, which states that changes in the money supply affect nominal variables but not real variables like real GDP or unemployment in the long run.
Step 2: Recall that an increase in the money supply shifts the aggregate demand curve to the right, initially increasing output and lowering unemployment in the short run due to price and wage rigidities.
Step 3: Recognize that in the long run, prices and wages adjust fully, causing the aggregate supply to shift or the economy to return to its natural level of output and unemployment, eliminating any real effects of the money supply change.
Step 4: Conclude that the main long-run effect of an increased money supply is a proportional increase in the overall price level (inflation), with no permanent change in real GDP or unemployment.
Step 5: Therefore, the correct long-run outcome is a higher price level with no change in real output, consistent with the classical macroeconomic theory.
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