Question

According to classical macroeconomic theory, changes in the money supply affect:_______.
a. real GDP and the price level.
b. real GDP but not the price level.
c. the price level, but not real GDP.
d. neither the price level nor real GDP.

Answer 1

Answer:

Option A. real GDP and the price level.

Explanation:

Option “A” is correct because the change in money supply (say increase) will decrease the interest rate and that will result in an increase in investment and more investment will generate more jobs and more money in consumers’ hands. Thus, they will stimulate the spending and aggregate demand will increase. Resulting in the rise in price and rise in real GDP. therefore, option A is right.