Question

multiple choice 1.112 points
suppose monetary velocity is constant but the fed increases the money supply by 5%. which of the following will be the result, according to the quantity theory of money and monetary neutrality.
in the short run economic growth may be higher, but in the long run only inflation will be higher.
in the short run only inflation will be higher, but in the long run economic growth may be higher.
neither inflation nor economic growth will be higher, either in the short or long run.
inflation and economic growth will be higher in the short and long run.

Explanation:

According to the quantity theory of money \( MV = PY \) (where \( M \) is the money supply, \( V \) is the velocity of money, \( P \) is the price level, and \( Y \) is real output). In the long - run, money is neutral, which means changes in the money supply (\( M \)) do not affect real variables like economic growth (\( Y \)). Economic growth is determined by factors such as technology, labor, and capital in the long - run. However, an increase in the money supply will lead to an increase in the price level (\( P \)), i.e., inflation. In the short - run, there can be some real effects (e.g., due to sticky prices and wages), but in the long - run, only inflation is affected.

Answer:

In the short run economic growth may be higher, but in the long run only inflation will be higher.