Over the last several years, the money supply in Indonesia as increased by 9 percent in 2003 to 14 percent in 2005 and 23 percent in 2007. At the same time, real GDP has grown steadily at over 4 percent annually.
These changes would be shown as
i. rightward shifts of the AD curve
ii. a movement down along the short-run Phillips curve
iii. rightward shifts of the LAS curve

Question

Quizplus · Accepted Answer

An increase in the money supply would shift the AD curve to the right, as there is more money available to spend in the economy. This would result in higher inflation and higher real GDP growth. As real GDP has grown steadily, this suggests that there has been a rightward shift of the LAS curve, indicating an increase in potential output. Therefore, the correct answer is A, as both i and iii are correct. A movement down along the short-run Phillips curve is not necessary to explain these changes.

Over the Last Several Years, the Money Supply in Indonesia