Answer to Question #221821 in Macroeconomics for Catherine

Question

Using figures, explain why expansionary monetary policy cannot increase output in the long run.

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Answer 1

Expansionary monetary policy cannot increase output in the long run because, in the long run, the increase in money supply puts upward pressure on prices, leading to inflation. For example, an increase in raw materials prices from $100 to $200 will result in an increased cost of production, thereby leading to reduced output.