According to the model of aggregate supply and aggregate demand, in the long run, an increase in the money supply should cause

Question

a. prices to fall and output to fall.
b. prices to rise and output to remain unchanged.
c. prices to fall and output to remain unchanged.
d. prices to rise and output to rise.

Answer 1

In the long run, an increase in the money supply, according to the model of aggregate supply and aggregate demand, should primarily affect the price level rather than the output. The correct answer would be:

b. prices to rise and output to remain unchanged.

This reflects the idea that in the long run, the economy operates at full employment, and changes in the money supply mainly impact prices rather than output.