Most economists believe that classical theory describes the world in the long run but not in the short run.?

Question

According to most economists, changes in the money supply:

A. Can affect real GDP in the long run, but not the short run

B. Can affect real GDP in the short run, but not the long run

C. Can affect real GDP in both the short run and the long run

D. Have no impact on real GDP in either the short run or the long run

I chose C, is that right?

Answer 1

Answer is B. Money, in the long run is neutral.

The change in the money supply will shift the AD curve up and to the right but the SRAS curve is constant since no price expectations adjustments have occured as of yet. Note that ouput rises and so does the price level.



In the long-run, the SRAS curve will shift back and to the left raising the price level even more so and output will return to the potential level of output.

So, in the short run a change in money supply can increase output beyond the potential level of output. But, in the long run only the price level will rise and output will be at the potential level.

Here's a graph:

http://edwardmcphail.com/intromacro/lect...

I hope this helps