Question

You have been tasked with advising the dictator of a nation over what he should do to increase the countries GDP. He suggests printing money and increasing the growth rate of the money supply. He wants to give this newly printed currency to his soldiers and best political supporters. You know this will not increase GDP in the long run because...

I. Money is neutral

II. Increasing the growth of the money supply only causes inflation in the long run

III. He would only increase GDP in the long run if he distributed the money equally to all citizens

IV. He would only increase GDP in the long run only if he printed a large enough sum of money

Answer Choices

A) III Only

B) I, II, III and IV

C) I,II and III Only

D) I and II Only

Answer 1

• Neutrality of money states that money is neutral by nature which states that changes in money supply doesnt affect real variables like output of the economy and can only impact nominal variables like prices and wages.
• Increasing the money supply only increases the inflation in the long run. This is due to the fact that increasing the supply of money increases disposable income in hands of people , this causes demand to increase and ultimately causes prices to increase . So inflation rises in the long run.

Printing money and increasing the growth rate of the money supply. Giving this newly printed currency to soldiers and best political supporter would only cause inflation to rise in the long run and since money is neutral, it wont have any affect on GDP in the long run.

So option D) is correct - I and II