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?

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

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

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

The unemployment rate will decline below the natural rate.

Answer 1

In the short-run:

• The economy will experience cost push inflation since firms face a higher cost of borrowing.
• The unemployment rate will decline below the natural rate.