In the long run, a change in the money supply will affect which of the following?

• A. II only
• B. III only
• C. I, II, and III
• D. I only

Answer: (B)

In the long run, changing the money supply only affects nominal variables, not real ones. The economy’s real output, employment, and the natural rate of unemployment are determined by real factors like technology, resources, and preferences, and they tend to return to their natural levels after prices and wages fully adjust. When the money supply shifts, prices and wages adjust so that real balances return to their prior level, resulting in a higher or lower price level (and a higher or lower inflation rate if the change persists), while real GDP stays about the same.

So the statement that the price level is affected by a change in money supply is the one that holds in the long run, whereas statements about real output or unemployment being affected do not.