ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -It seems that in the short run, increases in the money supply lead to increases in output, but in the long run increases in the money supply just cause inflation.

Detailed explanation-2: -When the Federal Reserve increases the money supply, inflation may occur. More often than not, if the Fed is attempting to stimulate the economy by growing the money supply, prices will increase, the cost of goods will be unstable, and inflation will likely occur.

Detailed explanation-3: -The long-run aggregate supply curve is vertical because, in the long run, resource prices adjust to changes at the price level, which leaves no incentive for firms to change their output. In the long run, prices and wages have no effect on the aggregate supply curve.

Detailed explanation-4: -The long-run effect of a decrease in the money supply, then, is that the aggregate price level decreases, but aggregate output is back at potential output. In the long run, a monetary contraction decreases the aggregate price level but has no effect on real GDP.

Detailed explanation-5: -There is a direct relationship between the money supply in the economy and the level of prices of goods and services sold. If we increase the money supply in the left-hand side of the equation, the average price level will increase at the similar pace, which we can observe clearly from the market condition.