In the above figure, the economy initially is at point A and then an increase in the quantity of money moves the economy to point D. If the quantity of money remains constant, the economy will adjust with A) aggregate demand shifting back to AD₀. B) short- run aggregate supply shifting leftward to SAS₁. C) short- run aggregate supply shifting leftward to SAS₂. D) aggregate demand shifting to AD₂.

Question

Quizplus · Accepted Answer

When the quantity of money remains constant, the economy will adjust through short-run aggregate supply shifting leftward to SAS₁, as the increase in the price level that occurred with the increase in the quantity of money will lead to a decrease in the real money supply, increasing the cost of production, which in turn reduces the output level, shifting SRAS to the left.

In the Above Figure, the Economy Initially Is at Point