For an economy at full employment, an increase in the quantity of money will lead to which of the following sequences of shifts in aggregate demand and supply curves?

Question

Quizplus · Accepted Answer

An increase in the quantity of money leads to an increase in consumption and investment, thereby increasing aggregate demand. However, as the economy is already at full employment, any increase in aggregate demand will lead to an increase in prices rather than output in the long run. In the short run, the increase in aggregate demand may lead to firms increasing output, thereby increasing short-run aggregate supply. However, in the long run, as prices increase and resources become more expensive, firms may not be able to sustain the increased output, leading to a decrease in short-run aggregate supply. Therefore, an increase in the quantity of money will lead to an increased aggregate demand, decreased short-run aggregate supply, and constant long-run aggregate supply.

For an Economy at Full Employment, an Increase in the Quantity