If wages 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

When wages adjust to reflect expected inflation due to an anticipated increase in the money supply, both aggregate demand and the positively sloped aggregate supply curve shift to the right. This is because the increase in the money supply is expected to stimulate spending (shifting aggregate demand right) and the adjustment in wages reflects an anticipation of higher prices, not an immediate increase in production costs, allowing the supply side to also expand (shifting aggregate supply right).

If Wages Instantaneously Adjust to Reflect Expected Inflation That Is