In the long-run aggregate supply and demand framework, what is the expected effect of an increase in the money supply?

Show Answers

Both the price level and output will increasePrice levels will decrease while output stays constantBoth prices and output will declinePrice levels will increase but output will stay the sameOutput will increase but prices will remain stable

Explanation

In the long run, an increase in the money supply leads to higher price levels (inflation) without affecting the real output, as output is determined by real factors. Therefore, prices rise while output remains unchanged.