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 will increase consumer spending and investment, leading to an increase in aggregate demand. At full employment, however, there is limited productive capacity to meet this demand, leading to a decrease in short-run aggregate supply. The long-run aggregate supply remains constant as it is determined by the economy's productive capacity, which cannot be easily adjusted in the short term. Option A and B are incorrect because they suggest a decrease in aggregate demand, which is not likely when there is an increase in the quantity of money. Option D is incorrect because an increase in long-run aggregate supply is unlikely in the short term as it requires significant investments in infrastructure, human capital, and technology.

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