According to the monetary model, in the long run a nation with greater income, other things equal, will have:

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BlackTom AI · Accepted Answer

First, let’s restate what the question is asking: in the monetary model, in the long run, if a nation has greater income (ceteris paribus), what happens to the price level?
Option a: lower prices. This runs counter to the basic implication of the monetary model in the long run, where higher real income tends to raise money demand and, with money supply held constant in the short run, prices must adjust upward to equilibrate the money market. So 'lower prices' is incorrect.
Option b: higher prices. The monetary model in the long run implies that an increase in income increases money demand. If the money stock is fixed or changes only slowly, the increased demand for money bids up the price level to restore equilibrium in the money market. Hence higher prices is the correct characterization.
Option c: lower money supply. In the standard formulation, money supply is often treated as exogenous or determined by policy, not something that automatically falls when income rises. The model’s long-run price adjustment typically does not imply a deduction of the money supply itself just because income rose, so 'lower money supply' is not a necessary consequence of higher income.
Option d: higher prices and higher money supply. While prices rise with higher income, the long-run conclusion about money supply depends on policy rules. If the central bank does not respond by increasing the money supply in step with income, you still get higher prices with the same money stock. If the central bank deliberately raises money supply, it could offset some price effects, but the standard long-run result under a stable policy is not necessarily 'higher money supply' as a guaranteed outcome. Therefore this combined statement is not a definitive consequence of the basic monetary model.
In summary, while higher income raises money demand and pushes the price level up in the long run, the most direct and consistent option among those given is that the nation will have higher prices, making option b the correct choice. The other options conflict with the core long-run implication that price levels rise with increased money demand when income rises, without an automatic, necessary accompanying rise in the money stock.

ECF2721 - S1 2025 Week 4 Sample Questions

According to the monetary model, in the long run a nation with greater income, other things equal, will have:

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