FIGURE 27-4
-Refer to Figure 27-4. The economy begins in equilibrium at E0. Now consider an expansion of the money supply. What is the adjustment toward the new long -run equilibrium?
A) The AD curve shifts to AD1. The inflationary gap causes prices to rise, AS shifts to AS 1 and equilibrium is restored at E3.
B) The AD curve shifts to AD1. The inflationary gap causes wages to rise, AS shifts to AS1 and equilibrium is restored at E2.
C) The AS curve shifts to AS1 which causes the AD curve to shift to AD1, resulting in a new equilibrium at E2.
D) The AD curve shifts to AD1. The increased money supply causes an increase in potential output and a new long-run equilibrium at E1.
E) The AD and AS curves shift to AD1 and AS1 simultaneously. The increased price level pushes them back to AD0 and AS0 and equilibrium is restored at E0.
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