Suppose that the money prices of raw materials increase so that the 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 prices.
III. result initially in lower employment and a higher price level.
A) I only
B) both I and II
C) both II and III
D) III only

Question

Quizplus · Accepted Answer

The correct answer is that the higher money price of raw materials will result initially in lower employment and a higher price level (III). This is because an increase in the cost of raw materials makes production more expensive, leading to a decrease in the short-run aggregate supply. This does not directly affect the aggregate demand curve, but it does result in a higher price level and can lead to lower employment as companies reduce output. Choices I and II incorrectly suggest a rightward shift of the aggregate demand curve as a direct result of higher raw material costs, which is not a typical immediate consequence.

Suppose That the Money Prices of Raw Materials Increase So