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Compared with a closed economy, an increase in the growth rate of the money supply in...

Compared with a closed economy, an increase in the growth rate of the money supply in an open economy increases aggregate demand by a:

A.

larger amount only in the short run.
B.

smaller amount in both the short run and the long run.
C.

smaller amount only in the short run.
D.

larger amount in both the short run and the long run.
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Answer #1

Answer: A -

Explanation: Increase in growth of money supply will increase aggregate demand in an open economy in larger amount only in the short run because initially increased money supply will increase aggregate demand and increased aggregate demand will increase investment and production and increase in loanable funds and due to increase in loanable funds interest rates will get increased in the long run and due to increased interest rates demand for loanable funds will get decreased and due to that production will get decreased which will cause decrease in aggregate demand in the long run.

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