Answer to Question #246437 in Macroeconomics for Prisca Mahlalela

Question

Suppose the economy is initially at its long run equilibrium. If the nominal money supply increases, 

which of the following is a correct statement regarding how the economy will respond in the short-

run?

A. The unemployment rate will decline below the natural rate.

B. The economy will experience cost push inflation since firms face a higher cost of borrowing.

C. The unemployment rate will rise above the natural rate and inflation will fall.

D. The natural rate of unemployment will fall and the economy will experience demand pull 

inflation

Answer 1

A. The unemployment rate will decline below the natural rate.

B. The economy will experience cost push inflation since firms face a higher cost of borrowing.