If wages do not instantaneously adjust to reflect expected inflation that is based on an anticipated increase in the money supply,
A) the aggregate demand and positively sloped aggregate supply curve shift to the right at the same time.
B) the positively sloping aggregate supply curve shifts to the left after the aggregate demand curve shifts to the right.
C) the positively sloping aggregate supply curve shifts to the left before the aggregate demand curve shifts to the right.
D) the positively sloping aggregate supply curve does not shift to the right at the same time as the aggregate demand curve shifts to the left.

Question

Quizplus · Accepted Answer

If wages do not instantaneously adjust to reflect expected inflation based on an anticipated increase in the money supply, then the positively sloping aggregate supply curve will shift to the left after the aggregate demand curve shifts to the right. This is because firms will continue to produce at their current levels in the short run, but as wages eventually adjust to the higher inflation levels, production costs will increase, causing a leftward shift in the aggregate supply curve.

If Wages Do Not Instantaneously Adjust to Reflect Expected Inflation