Changes in both the money supply and the velocity of money induce changes in aggregate demand. However, the long-term impacts of changes in these variables are different. How are the effects of an increase in the velocity of money different from the effects of an increase in the money supply? Which of the following is correct?
(a) In the short run, changes in the money supply affect only the real growth rate, but changes in the velocity of money affect both the price level and the growth rate.
(b) Changes in the money supply can lead to permanent changes in aggregate demand, but changes in the velocity of money tend to have temporary changes in aggregate demand.
(c) Both can induce inflation in the short run, but only an increase in the velocity of money will lead to an increase in inflation in the long run.
(d) In the short run, changes in the velocity of money only affect the real growth rate, but changes in the money supply affect both the price level and the growth rate.
(e) Changes in the money supply are necessarily temporary, but changes in the velocity of money are necessarily permanent.
(f) Ceteris paribus, a change in the velocity of money has a more significant impact on aggregate demand than a change in the money supply.

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The correct statement among the options provided is c Both can induce inflation in the short run but ... View the full answer