Question

Increases in the money supply will cause demand for investment and consumption goods to __________ in the short run and may cause prices to __________ in the long run.

Answer 1

Answer:

Increases in the money supply will cause demand for investment and consumption goods to INCREASE in the short run and may cause prices to INCREASE in the long run.

Explanation:

When the money supply increases, there is more money in the economy, which results in higher consumption levels ⇒ resulting in higher aggregate demand. If the increase in the money supply is larger than the increase in real output (aggregate supply), the general price level will increase (inflation). The logic behind this is quite simple, you will have more cash to buy the same amount of goods and services, therefore, the price of goods and services will increase.