Explain why a large increase in the money supply causes a larger short-run increase in

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QUESTION:

Explain why a large increase in the money supply causes a larger short-run increase in real GDP in an economy that previously had low inflation than in an economy that previously had high inflation. What does this say about situations in which the classical model of the price level applies?

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QUESTION:

Explain why a large increase in the money supply causes a larger short-run increase in real GDP in an economy that previously had low inflation than in an economy that previously had high inflation. What does this say about situations in which the classical model of the price level applies?

ANSWER:

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Normally, whenever money supply increases in any economy via any means, the aggregate supply or the real GDP generally grows with a huge level of investments. The producers get huge loans at low-interest rates for which they start investing, and on finding an increase in aggregate demand, they feel motivated to invest more.

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