Suppose that the money prices of raw materials increase so that short- run aggregate supply decreases. If the Federal Reserve does not respond, the higher money price of raw materials will
I. repeatedly shift the aggregate demand curve rightward and raise the price level.
II. shift the aggregate demand curve rightward and the aggregate supply curve leftward, raising p
III. result initially in lower employment and a higher price level.
A) I only
B) III only
C) both I and II
D) both II and III

Question

Quizplus · Accepted Answer

If the Federal Reserve does not respond to the increase in money prices of raw materials, then there will be a decrease in short-run aggregate supply. This will initially result in lower employment and a higher price level, as stated in option III. Option I is incorrect because the higher money price of raw materials will not repeatedly shift the aggregate demand curve rightward, as the aggregate demand curve is not continuously shifting. Option II is incorrect because it suggests that both the aggregate demand and supply curves will shift rightward, which is not necessarily the case if the Federal Reserve does not respond.

Suppose That the Money Prices of Raw Materials Increase So