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 the price level?
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 the price level?  
A) vertical 
B) steeply sloped 
C) 45 degrees 
D) relatively flat

Quizplus · Accepted Answer

When the money supply expands, it results in an increase in aggregate demand, which in turn puts upward pressure on prices. In the short run, however, due to sticky wages and prices, firms may not be able to adjust their prices immediately, leading to an increase in output and employment in the short run. However, as producers start to adjust their prices to reflect the higher demand for their goods, the short-run aggregate supply curve becomes steeper and steeper until it becomes perfectly vertical. At this point, any increase in aggregate demand will result in a one-for-one increase in the price level, with no change in output or employment. Thus, the vertical short-run aggregate supply curve represents the largest short-run increase in the price level.

Suppose the Money Supply Expands