Starting from short-run equilibrium,the following occurs: the money supply increases and labor productivity increases.What is the effect on the price level and Real GDP in the short run?
A) Real GDP falls and the price level necessarily rises.
B) Real GDP rises and the price level necessarily rises.
C) Real GDP rises and the effect on the price level cannot be determined.
D) Real GDP falls and the effect on the price level cannot be determined.
E) none of the above

Question

Quizplus · Accepted Answer

An increase in money supply will lead to an increase in aggregate demand, shifting the AD curve to the right. This will lead to an increase in both Real GDP and the price level. However, an increase in labor productivity will lead to a decrease in production costs, shifting the SRAS curve to the right. This will lead to an increase in Real GDP and a decrease in the price level. The net effect on the price level will depend on the relative magnitude of the shifts in the AD and SRAS curves. Therefore, it cannot be determined with certainty whether the price level will rise or fall, but it is clear that Real GDP will rise.

Starting from Short-Run Equilibrium,the Following Occurs: the Money Supply Increases