1. will always cause an immediate jump in the price level.
2. will increase the inflation rate by more in the short run than in the long run.
3. will increase the price level because the public's desired real money holdings will increase.
4. will do all of the above for the reasons given.
Choose the correct option.
The answer is option 2. In addition to the increase in the rate of growth of the price level in proportion to the increase in the money supply, there will be a further jump in the price level once the public's expectations of future inflation increase to match the actual increase in the inflation rate. This jump will not necessarily be immediate. But during the interval of time over which this jump in the level of prices occurs the inflation rate will be higher than it will be in the long run when it will simply equal the addition to the rate of money supply growth. The increase in the public's expected rate of inflation will lead them to hold less real money balances, not more.