The Short-Run and Long-Run Effects of an Increase in the Money SupplyAn increase in the money supply generates a positive short-run effect, but no long-run effect, on real GDP. Here, the economy begins at E1, a point of short-run and long-run macroeconomic equilibrium. An increase in the money supply shifts the AD curve rightward, and the economy moves to a new short-run equilibrium at E2 and a new real GDP of Y2. But E2 is not a long-run equilibrium: Y2 exceeds potential output, Y1, leading to an increase in nominal wages over time. In the long run, the increase in nominal wages shifts the short-run aggregate supply curve leftward, to a new position at SRAS2. The economy reaches a new short-run and long-run macroeconomic equilibrium at E3 on the LRAS curve, and output falls back to potential output, Y1. The only long-run effect of an increase in the money supply is an increase in the aggregate price level from P1 to P3.