Figure A below depicts the demand and supply of Japanese yen in the foreign currency exchange market. Figure B below depicts the aggregate supply-aggregate demand model for the Japanese economy. Use these figures to answer the next two questions:

-Which of the following is the most accurate description of the phenomenon shown in Figure B?

Question

Figure A below depicts the demand and supply of Japanese yen in the foreign currency exchange market. Figure B below depicts the aggregate supply-aggregate demand model for the Japanese economy. Use these figures to answer the next two questions:

-Which of the following is the most accurate description of the phenomenon shown in Figure B?

Quizplus · Accepted Answer

Figure B depicts the aggregate supply-aggregate demand model for the Japanese economy. The increase in money supply from S1 to S2 is shown as a rightward shift in the aggregate demand curve from AD1 to AD2. This causes an increase in the price level from 115 to 120 and a decrease in the short-run aggregate supply from SRAS1 to SRAS2. Option B correctly describes this phenomenon. Option A incorrectly implies that the increase in money supply caused a fall in the price level, whereas in fact, it caused an increase. Option C incorrectly describes a decrease in money supply, which is contrary to what is shown in the figure. Option D implies that the increase in money supply caused a fall in real GDP, whereas there is no evidence of this in the figure. Option E implies that the increase in aggregate demand was a response to an increase in money supply, whereas the opposite is true according to the figure.

Figure a Below Depicts the Demand and Supply of Japanese