Exhibit 16.3

-Refer to Exhibit 16.3. An expansionary monetary policy and higher wage agreements will eventually cause the short-run aggregate supply curve in to shift _____, intersecting ____ at point _____, the economy's potential output.
A) leftward, AD', a
B) leftward, AD', b
C) leftward, AD', c
D) leftward, A', a
E) leftward, AD, b

Question

Exhibit 16.3
 
-Refer to Exhibit 16.3. An expansionary monetary policy and higher wage agreements will eventually cause the short-run aggregate supply curve in to shift _____, intersecting ____ at point _____, the economy's potential output.
A) leftward, AD', a 
B) leftward, AD', b 
C) leftward, AD', c 
D) leftward, A', a 
E) leftward, AD, b

Quizplus · Accepted Answer

An expansionary monetary policy will shift the aggregate demand curve to the right (AD to AD'). Higher wage agreements will shift the short-run aggregate supply curve to the left (SRAS to SRAS'). The intersection point of SRAS' and AD' will be at point c, which is below the economy's potential output. This will result in an increase in price level and a decrease in output in the short run. Therefore, the correct choice is C.

Exhibit 16.3 -Refer to Exhibit 16.3. an Expansionary Monetary Policy and Higher