Suppose the short-run aggregate supply curve is positively sloped and the money supply increases.What is the effect on aggregate demand?
A) Aggregate demand increases, which increases real GDP and increases the price level.
B) Aggregate demand increases, which decreases real GDP and decreases the price level.
C) Aggregate demand falls, which increases real GDP and increases the price level.
D) Aggregate demand falls, which decreases real GDP and increases the price level.

Question

Suppose the short-run aggregate supply curve is positively sloped and the money supply increases.What is the effect on aggregate demand?  
A) Aggregate demand increases, which increases real GDP and increases the price level. 
B) Aggregate demand increases, which decreases real GDP and decreases the price level. 
C) Aggregate demand falls, which increases real GDP and increases the price level. 
D) Aggregate demand falls, which decreases real GDP and increases the price level.

Quizplus · Accepted Answer

An increase in the money supply shifts the aggregate demand curve to the right. In the short-run, the positive sloping aggregate supply curve implies that as firms' costs increase, they will need to raise prices to maintain profits. This results in an increase in both real GDP and the price level. Therefore, the correct choice is A as it reflects the effect of an increase in the money supply on aggregate demand.

Suppose the Short-Run Aggregate Supply Curve Is Positively Sloped and the Money