Suppose that the money prices of raw materials increase so that short-run aggregate supply decreases. If the Reserve Bank 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) iii only
B) i and iii
C) i and ii
D) ii and iii
E) i only

Question

Quizplus · Accepted Answer

iii only. An increase in the money prices of raw materials will directly affect the short-run aggregate supply by shifting it leftward, leading to higher prices and lower employment initially. This does not inherently cause the aggregate demand curve to shift rightward; such a shift would require separate actions that affect demand, not just supply-side changes.

Suppose That the Money Prices of Raw Materials Increase So