Suppose that the money prices of raw materials increase so that short-run aggregate supply decreases. If the Federal Reserve does not respond, the higher money price of raw materials will
I.repeatedly shift the aggregate demand curve rightward and raise the price level.
II.shift the aggregate demand curve rightward and the aggregate supply curve leftward, raising prices.
III.result initially in lower employment and a higher price level.
A) I only
B) both I and II
C) both II and III
D) III only

Question

Quizplus · Accepted Answer

If the Federal Reserve does not respond, the increase in the money price of raw materials would lead to a decrease in short-run aggregate supply, resulting in higher prices and lower employment in the short-run (as shown by the leftward shift in the short-run aggregate supply curve). Meanwhile, there would be no shift in the aggregate demand curve, as higher input prices would reduce the purchasing power of consumers and firms, leading to a decrease in aggregate demand. Therefore, choices I and II are incorrect, and only choice III is correct.

Suppose That the Money Prices of Raw Materials Increase So