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Question: According to Monetarism, when does an increase in money supply change both Real GDP and...

Question: According to Monetarism, when does an increase in money supply change both Real GDP and
price level? In the short run or in the long run? Explain your answer using a diagram.

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Answer #1

According to Monetarism, an increase in Money Supply change both Real GDP and Price Level in the short run.

According to monetarists, in the long run AS Curve is Vertical. Thus, in the long run there is no Increase in Real GDP as a result of Increase in Money Supply. But in the short run, Aggregate Supply (AS) Curve is Upward sloping according to Monetarists. Hence, an increase in money supply in the short run, leads to an increase in both Price level and Real GDP. This has been shown in the Diagram below in which due to increase in money supply Aggregate Demand Increases which leads to an increase in both Price level and Real GDP.

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