Suppose that the money prices of raw materials rise.With no action by the Bank of Canada, I.the aggregate demand curve shifts rightward and the price level rises.
II.the aggregate demand curve shifts rightward and the aggregate supply curve shifts leftward.
III.the initial outcome is lower employment and a rise in the price level.
A)I only
B)II only
C)III only
D)I and II only
E)I, II, and III

Question

Quizplus · Accepted Answer

The correct answer is III only because when the money prices of raw materials rise, it increases the cost of production for companies, leading to a decrease in aggregate supply (shifts leftward), not an increase in aggregate demand. This results in higher prices and lower employment in the short run, as companies produce less due to higher costs.

Suppose That the Money Prices of Raw Materials Rise