Suppose the money supply expands.What will be the shape of the short-run aggregate supply curve that yields the largest short-run increase in real GDP?
A) vertical
B) steeply sloped
C) 45 degrees
D) relatively flat

Question

Suppose the money supply expands.What will be the shape of the short-run aggregate supply curve that yields the largest short-run increase in real GDP?  
A) vertical 
B) steeply sloped 
C) 45 degrees 
D) relatively flat

Quizplus · Accepted Answer

The short-run aggregate supply curve will be relatively flat because an expansion in the money supply will reduce interest rates, increase investment, and increase aggregate demand. This will lead to an increase in output in the short-run as firms increase production to meet the higher demand. However, in the long run, firms will adjust prices in response to the increased demand, leading to a higher price level but not a sustained increase in output.

Suppose the Money Supply Expands