Long Run Neutrality of Money
The long run neutrality of money tells us that in the long run, higher money supply has no effect on the output, it only leads to higher inflation.
Short Run
- When the central bank increases the money supply it causes the interest rates to ________
- This causes Aggregate ________to shift to the ________
- The equilibrium price level ________ and the output ________ , which leads to an ________ gap (boom).
Long Run
- The inflationary gap causes wages to eventually ________
- This causes Aggregate ________ to shift to the ________
- The equilibrium output goes back to the original level and the price level goes even higher
- In the long run, higher money supply has no effect on the output, it only leads to higher inflation.