An increase in short-run aggregate supply immediately leads to:
A) an increase in real wealth and a shift of the aggregate demand curve.
B) an increase in real wealth and a movement along the aggregate demand curve.
C) a shift of the aggregate demand curve caused by menu costs.
D) a shift of the aggregate demand curve caused by money illusion.
E) an increase in money illusion and a movement along the aggregate demand curve.

Question

Quizplus · Accepted Answer

An increase in short-run aggregate supply means there is a greater quantity of goods and services supplied at each given price level. This leads to a decrease in the price level and an increase in real wealth, as consumers can purchase more goods with their income. However, this increase in real wealth does not cause a shift in the aggregate demand curve. Instead, it leads to a movement along the aggregate demand curve, as consumers increase their quantity demanded in response to the lower price level. Therefore, the correct answer is B.

An Increase in Short-Run Aggregate Supply Immediately Leads To