Suppose there is a $1 trillion increase in the money supply that causes the aggr

Question

Suppose there is a $1 trillion increase in the money supply that causes the aggregate demand curve to shift rightward If people do not anticipate the increase in the money supply, in the short run, the short-run supply curve OA. does not shift OB. becomes horizontal. O C. shifts rightward immediately OD. shifts leftward immediately In the short run, there is a movement from OA. CtoB B. AtoC. O C. B to C. O D. A to B In the long run, there is O A. no further change O B. movement from C to B O C. movement from B to C. 0 D. movement from A to C

Explanation / Answer

(a)

Increase in money supply fuels inflation. So, price level in economy will increase.

Increase in price level leads to upward movement along the short-run aggregate supply curve and not the shift in the short-run aggregate supply curve.

So, if people do not anticipate the increase in money supply then in the short run there will be no shift in the short-run supply curve.

The correct answer is the option (A).

(b)

The given figure shows that initial equilibrium is at point A. With no shift in SRAS curve and LRAS curve, the rightward shift of AD curve will move the short-run equilibrium from point A to point B.

So, in short-run, there is a movement from A to B.

The correct answer is the option (D).

(c)

As people will anticipate the increase in money supply and resultant inflation, they will demand higher wages leading to fall in production and will shift SRAS curve leftward.

This leftward shift will move the economy to new long-run equilibrium at point C.

Thus, in the long-run, there is movement from B to C.

The correct answer is the option (C).

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