Suppose that the Central Bank announces that it will increase the money supply by 5%. Producers collectively determine that this will cause a 5% increase in both the price of their products and the cost of their inputs. How will this impact real GDP?
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A. B. C. D. E. F.F
In order for an increase in the money supply to cause a temporary increase in production, firms must essentially be fooled by inflationary price increases that are misread as an increase in demand. In the scenario described, producers know of the change in money and expect inflation, therefore the increase in the money supply has no impact.