"economics"exercise:Money supply

B is correct. The phenomenon of money neutrality states that, in the long run, an increase in the money supply will simply lead to an increase in the price level while leaving real economic variables such as output and employment unaffected.

A is incorrect because if money neutrality holds, then an increase in the money supply will not affect real output or the speed with which money circulates. As explained by the quantity equation of exchange M × V = P × Y, with real output (Y) unaffected, there is no need for money to change hands more rapidly via increased velocity (V) with only the aggregate price level (P) rising.

C is incorrect because money neutrality states that, in the long run, price levels are affected (rather than unaffected) by an increase in the money supply, but such an increase will not affect real economic variables such as output and employment.

A is correct. Aggregate demand rises when the government increases spending by the same amount as it raises taxes because the marginal propensity to spend out of disposable income is less than 1, and hence for every dollar less in disposable income, spending only falls by $c (where c is the marginal propensity to consume). Aggregate spending will fall less than the tax rise by a factor c. This additional output will, in turn, lead to further increases in income and output through the multiplier effect.

B is incorrect. Aggregate demand rises when the government increases spending by the same amount as it raises taxes because the marginal propensity to spend out of disposable income is less than 1, and hence for every dollar less in disposable income, spending only falls by $c (where c is the marginal propensity to consume). Aggregate spending will fall less than the tax rise by a factor c. This additional output will, in turn, lead to further increases in income and output through the multiplier effect.

C is incorrect. Aggregate demand rises when the government increases spending by the same amount as it raises taxes because the marginal propensity to spend out of disposable income is less than 1, and hence for every dollar less in disposable income, spending only falls by $c (where c is the marginal propensity to consume). Aggregate spending will fall less than the tax rise by a factor c. This additional output will, in turn, lead to further increases in income and output through the multiplier effect.